Asia Faces a Tough 2009 as Output Decreases

Nations that engage in trading are not immune from the global economic crisis, as it spreads first throughout the trade-deficit, consumption nations and then on to the trade-surplus, producer nations, explains finance professor Michael Pettis for the Financial Times. Pettis offers three ways for the global economy to adjust: The rich countries can continue borrowing and consuming, or the trade-surplus producer nations can sharply increase their consumption – both unlikely scenarios. Or, global production can reduce the overcapacity. “Before this happens there is a grave risk that individual Asian countries will try to avoid the contraction in demand by increasing their ability to export overcapacity by enacting trade-related measures – export subsidies, subsidised financing, currency depreciation, import tariffs – that enable them to force the overcapacity adjustment on to their trading partners,” explains Pettis. The US had similar overcapacity in 1929, and artificial adjustments and protectionism led to a total collapse in international trade. Now Asia must handle its overcapacity, and Pettis predicts that 2009 will be a tough year for both Asia and the global economy. – YaleGlobal