Thursday, 23 March 2006

Industrial orders fall in Europe, protectionism looms

A big drop in orders for transport equipment caused a large fall in industrial new orders in Europe, according to Eurostat yesterday.

The euro-zone industrial new orders index fell by 5.9% in January 2006 compared to December 2005 after rises of 5.3% in December and 4.9% in November. EU25 new orders decreased by 3.8% in January 2006, after increases of 5.8% in December and 3.5% in November. In both zones these changes were strongly influenced by erratic orders for heavy transport equipment: excluding ships, railway and aerospace equipment, industrial new orders grew by 0.2% in January 2006 in the euro-zone and by 2.3% in the EU25.

In January 2006 compared to January 2005, industrial new orders increased by 9.7% in the euro-zone and by 11.1% in the EU25. Total industry excluding ships, railway and aerospace equipment increased by 10.7% in the euro-zone and by 12.9% in the EU25.

The year-on-year rates still look good though, so I think there is little to worry about here.

Protectionism, on the other hand, could be a real risk.

Morgan Stanley's chief economist Stephen Roach covers the proceedings at the China Development Forum in his latest commentary. In it, he points out that China is already taking steps to "tilt its macro structure away from a growth dynamic that has become overly reliant on exports and fixed asset investment" and instead "focus increasingly on boosting its support from domestic demand -- especially private consumption".

However, the process "will take time -- and possibly a good deal of it". In the meantime, aggregate economic growth "could well slow as the consumption impetus lags the more immediate deceleration of investment and exports".

At the forum, Roach raised a question on the risks to the US-China trade relationship, to which Premier Wen Jiabao's response is described as follows:

“China views this relationship as very important,” he said, “and takes these risks very seriously.” He implied that efforts will be made to further expand Chinese imports from the US as well as deal with the all-important concerns over intellectual property rights. He was emphatic in re-emphasizing the limited role that foreign exchange policy could play in tempering the US saving shortfall and related trade imbalance -- in effect, implying no major change in the RMB exchange rate. At the end of his discourse, he leaned forward, looked me straight in the eye, and stated with great emphasis, “You can take this message back to the American people: It is unfair to make China a scapegoat for structural problems facing the US economy.”

That probably did not go down well with some US politicians. As Roach describes:

The next morning, as luck would have it, I had the opportunity over breakfast to run Premier Wen’s comment by three US politicians who just happened to be in town -- Senators Schumer, Graham, and Coburn... Schumer and Graham, of course, are co-sponsors of a bill (S. 295) that would impose 27.5% tariffs on all Chinese imports into the US unless there was an RMB currency revaluation of a like amount...

Chuck using the bully pulpit of a prominent politician to put so much pressure on China that it will have no choice other than to give. Nor does he have much doubt that this approach will work. “This is exactly what I did in Japan in 1986,” he said -- apparently the last time he was in Asia. “It worked in Japan and it will work in China.”

The problem is: If China after 2006 follows the path of Japan after 1986, the Chinese authorities probably would not be very pleased.

Plus they would probably have read Henry Liu.

Update: As far as protectionism is concerned, there is already criticism of the US at the WTO: From BT (subscription may be required):

THE United States came under criticism at the World Trade Organization (WTO) yesterday for pursuing what its key trading partners described as protectionist measures and unsustainable macro economic policies, diplomats said.

China said Washington is increasingly resorting to 'security exceptions' in its trade and investment policies, and that such exceptions go against an open and liberal economy.

Switzerland called on the US to adopt careful macro-economic policies to 'progressively reduce' its twin deficits.

During a US trade policy review meeting, India, Brazil, Chile, the European Union and Asean countries complained about Washington's imposition of tough restrictions on imports through the Bioterrorism Act and contingency measures such as anti-dumping and anti-subsidy regulations.

And a nationalistic trend in Europe is raising concerns there as well. From Deutsche Welle:

EU leaders will gather for their traditional two-day spring economic summit focused on promoting growth and jobs in the 25-nation bloc, which fears being overtaken by growing giants such as China and India.

But on the eve of the gathering, plans emerged for a joint letter, initiated by Italy but which may be co-signed by other more pro-reform states, denouncing a new protectionist trend in some states. EU leaders and some member countries have been dismayed at recent attempts by France and Spain to stave off takeovers by foreign companies.

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