Another excellent article by Sebastian Mallaby in the Post, this time on exchange rates. Mallaby is concerned that even if the current international trading regime staves off high levels of protectionism (à la Smoot-Hawley), nations will still be able to use exchange rates to compete, in an ever-downward spiral of devaluation. Yikes!

To make matters worse, Mallaby highlights a disturbing fact that many major economic powers seem to be betting on the export market as the engine of growth.

Will that export growth prove possible? The trouble is that other major economies harbor the same hope. Angela Merkel, the German chancellor, has stated categorically that Germany likes its export-led growth model and has no plans to change. Japan, to its credit, has passed a hefty stimulus, allowing government spending to replace exports, but it cannot sustain this policy because its national debt is astronomical. That leaves one other big economy — China. Some Chinese leaders want to shift toward domestic consumption rather than exports, which is why the government’s stimulus package includes money for health care. But the Chinese also want to boost growth urgently, and the surest way to do that is to spend money on the things that they are used to spending money on — ports, roads and other infrastructure that winds up stoking China’s export engine.

If the United States, Germany, Japan and China all aim to boost exports, we are in for trouble. It is impossible for all the big economies to improve their trade positions simultaneously; a jockeying for advantage, through the manipulation of exchange rates or through other measures, is certainly conceivable.

Throughout this economic downturn (in fact, for several years beforehand), lots of folks have been calling for a rebalancing of the Chinese economy towards domestic consumption. With the current recession and the importance of the Chinese economy in the world, this issue is now mainstream.

As Mallaby points out, it’s just not going to be possible for everyone to find some magical, gigantic new export market out there that will pull their economy out of the ditch. This all makes rebalancing absolutely crucial to global economic health.