Is a trade war brewing? Certainly this article in today's FT would suggest it's a possibility, with China threatening to retaliate if US politicians pass a proposed anti-China currency bill.
Concerns about trade and currency wars have been bubbling for some time: nearly a year ago now we hosted a debate on twitter about the likelihood of a currency war derailing the recovery. At the time China's authorities allowing the renminbi to appreciate against the dollar was seen as a key stepping stone to avoiding currency and trade wars. They did just that.
In the last year or so, this is what has happened to the US Dollar / Chinese Yuan exchange rate:
So what is sparking off tensions this time?
Back in July in our Economic Prospects publication we said that "protectionism was the dog that didn't bark during the recession, [but] it could well be back on the table if the global economy is facing a period of economic weakness"
And, as the FT article points out, the US (as with much of the developed world) is still suffering from
…economic problems such as insufficient savings, a large trade deficit and high unemployment
The problem for the world economy is that
[trade interventions] may seriously affect the entire progress of China's reform of its yuan exchange rate regime and also lead to a trade war”
Of course the bill may not make it through the US's often-obstructive legislative system, but it could have major implications for the global recovery if it does.