For two years some commentators have been arguing that the contraction in global demand set off by the 2008 crisis would lead almost inevitably to a trade war, following much the same path that the world took in the 1930s. With anger already being expressed over disordered currency markets by several leaders before the meeting of the Group of Seven wealthy nations in Iqaluit, Canada, next month, it is beginning to look as if 2010 will be the year that proves them right.
This should cause alarm. A breakdown in trade will slow the global recovery and create hostility and mistrust between major economies, making a resolution of important global problems, including the environment, terrorism and nuclear proliferation, unlikely. If trade issues are to be resolved optimally, policymakers in the leading economies must begin by understanding how difficult the problems are for their counterparts.
Like the US before the 1930s Great Depression, China has benefited from a decade of surging productivity growth and an undervalued currency to claim an outsize share of global manufacturing and a relatively small share of global consumption, which re- quires it to export the surplus abroad.