Global Market Insights | A Fisher Investments Blog

Japan, China and Global Trade

2012 has been quite a year for territorial disputes. Argentina challenged the UK’s claim on the Falklands, Japan and South Korea had a very public war of words over the uninhabited Dokdo/Takeshima islets, and now China and Japan are tussling over the desolate Senkaku/Diaoyu islands.

Both countries claim sovereignty over the rocks, which a private Japanese family has owned since 1972. Complicating matters, Taiwan also claims the Diaoyu islands—and China still claims Taiwan. Earlier this year, Tokyo’s mayor announced the city government’s plans to purchase the islands to ensure China couldn’t seize them, which set off the current three-way spat. It boiled over earlier this month, when the Japanese government purchased the islands—in response, China deployed military vessels and threatened economic retaliation, and Chinese citizens protested Japanese businesses and embassies around the country. (For more on the dispute, see this excellent analysis from Simon Tisdall in The Guardian.)

In the wake of China’s actions, I’ve seen several articles suggesting the dispute could have a detrimental impact on trade between the two—with Japan’s economy bearing the brunt of it. Based solely on the size of each nation’s economy and China’s trade deficit with Japan, that might seem plausible—however, it’s not that simple. As the world was reminded after last year’s Great Tohoku Earthquake and Fukushima Daiichi nuclear disaster, Japan is still an important piece of the global supply chain. Autos, computers and other high-tech electronics—products manufactured in China—depend on Japanese parts. Severing trade ties with Japan could make life difficult for Chinese manufacturers, and I suspect the government understands this—Chinese officials are likely too pragmatic to make good on their threats.

Over at The Telegraph, Jeremy Warner took things one step further and suggested trade tensions between China and Japan are the latest development in a longer-term trend of creeping but subtle global protectionism. The article’s an interesting read, and it is true protectionist measures like export subsidies are on the rise. However, his conclusion that global trade will suffer because of this seems off base. Tit-for-tat trade restrictions and disputes have existed for ages. Yet global trade has risen steadily over time and is nearing its pre-recession highs, as shown below. High and rising trade doesn’t square with rising protectionism.

Exhibit: Global Trade, 1990 – 2010

 

Source: World Trade Organization.

Rising trade, in my view, is strong evidence that despite the rise in subtle protectionism, trade is getting freer. Looking forward, the benefits of all free trade agreements implemented in recent years should vastly outweigh the negative impact of mercantilist policies in some nations, and several more free trade agreements are in progress. A rise in protectionism would be a legitimate risk to the global economy and equity markets, but for now, it seems highly unlikely.

Fisher Investments on the Election

Though I don’t typically write about US events here, it struck me UK readers may be interested in Fisher Investments’ thoughts on the upcoming presidential election. Here are a few pieces the firm has published recently:

An Election Year Lexicon (The Street)

In Praise of Polarization (Investor’s Business Daily)

Fisher Investments Global Elections Update (MarketMinder)

Fisher Investments View of the US Presidential Election (YouTube)

What Effect Can the Election Have on Your Portfolio? (Flickr)

Road to Nowhere?

As EU/IMF/ECB officials resume their audit of Greece’s finances this week, they’ll no doubt be particularly disappointed in the government’s lack of progress in selling state-owned assets. To meet bailout terms, Greek officials pledged to raise €50 billion from state asset sales by 2020. To date, however, they’ve raised but €1.8 billion, and the program is floundering in bureaucratic morass.

They’re still pressing forward though, and the latest scheme involves leasing some of Greece’s uninhabited islands and islets to hotel/resort developers (selling the land outright isn’t permissible under Greek law). Among the roughly 6,000 islands under Greek sovereignty, the Hellenic Republic Asset Redevelopment Fund has identified about 40 that would be suitable for high-end resorts. Or, as Executive Director for Housing Andreas Taprantzis put it: “We have identified locations that have good terrain, are close to the mainland and have a well-developed infrastructure and, at the same time, pose no threat to national security.”

Buried in that innocent quote is a prime example of the vast inefficiencies of Greece’s public sector: The nation has 40 uninhabited islands with well-developed infrastructure. Now, that doesn’t necessarily mean the government spent a bunch of money building roads, bridges, sewer systems and power grids in areas where no one lived—many of these islands were inhabited at one time or another. But it does mean perfectly usable land has just been gathering dust for years or even decades simply because it’s government owned—there’s ample private-sector demand to develop these areas. Yet because the government couldn’t or wouldn’t put the land to its most efficient use, whether by selling or leasing it, they’ve likely missed out on a ton of economic activity and, by extension tax revenue. Probably not enough to have prevented Greece’s current predicament, but perhaps enough to ease at least some of the burden ordinary Greeks have borne these last five years.