From competitive devaluations to resource nationalism and financial fragmentation, the sinews of the global economy are feeling the strain of years of sub-par growth, adding urgency to the G20's efforts to revive demand.
Things could be a lot worse. Traditional trade protectionism is muted. Japan's success in driving down the yen by pre-announcing an easier monetary policy was a shot heard around the world but it has not touched off feared currency wars.
Continue Reading Below
Indeed, given its entrenched deflation, Japan is not even likely to be singled out at next week's meeting in Moscow of finance ministers from the Group of 20 leading economies.
There are no grounds for complacency, however.
The longer unemployment stays high, the more governments will be tempted to take measures that boost jobs at home but discriminate against foreign competitors. Subsidies, procurement policies, domestic-content requirements and health and safety standards all spring to mind.
Cue the need for firm leadership from the G20, which after a cracking start coordinating a global response to the 2008/09 financial crisis has struggled to remain relevant.
"The history of international economic cooperation is not a glorious one. Our expectations should be suitably modest. But that argues for working harder at it while being realistic about what we can expect," said Mark Thirlwell, director of international economics at Sydney think-tank the Lowy Institute.
Despite the G20's pledge not to hobble trade, 27 disputes were taken to the World Trade Organisation last year - two more than in 2010 and 2011 combined, noted Humayun Shahryar, chief executive of Auvest Capital Management, a hedge fund.
Countries had ramped up debt and printed money in the hope of reviving consumption so they would not have to scrap vast excess capacity in sectors such as autos. But that gamble was failing because governments had underestimated how much time they needed, Shahryar said.
"Eventually they will have to realize that demand is not there and they cannot keep all of this capacity afloat," he said. "So they will start putting up more barriers. That's why I'm expecting a full-fledged trade war."
Countries have commendably kept to their WTO commitments since the onset of the global financial crisis and have not raised tariffs.
Nevertheless, an estimated 1 percent to 5 percent of global imports have been affected by various policies aimed at aiding domestic producers. Examples include the bailout of U.S. car makers and China's ban on the export of rare earths.
"All of these things are worrying because they all amount to creeping regulatory protectionism," said Razeen Sally, a trade economist with the National University of Singapore.
He was not unduly alarmed by what had happened or by the latest scramble to get a competitive currency edge, however: "So far it hasn't had the knock-on effect of trade restrictions leading all the way to exchange controls, which is what happened in the 1930s. Governments seem to have kept it muted."
GLOBAL SUPPLY CHAINS
Sally said he was more worried that excessively loose monetary and fiscal policy, coupled with an increasing home bias in banking and finance, could eventually lead to a repeat of the stagnant growth and high inflation that marked the 1970s.
���Stagflation' in turn might usher in outright trade protectionism. This had been kept at bay so far by the very nature of today's global economy, with components sourced around the world and crossing multiple borders before they are finally assembled into finished goods.
"Hurrah for global supply chains, because they provide us with the interests that lobby governments to keep markets open," Sally said.
Recent research by the WTO and the Organisation for Economic Cooperation and Development cast new light on just how critical these extensive webs are for global growth.
WTO chief Pascal Lamy recounted how he had recently visited a Toyota plant on the remote Pacific island of Samoa that employed 500 people to produce cabling for cars that were assembled in Australia.
"What you have to focus on is where you can exploit your capacity to add value through participation in international trade," Lamy said at the launch of the research report in Paris.
And there's the rub. Will political support for such supply chains wither if job growth does not resume and currency wars take off?
WHERE ARE THE CHEERLEADERS?
The percentage of Americans who think it would be best for the United States to stay out of world affairs is now the highest since World War Two, according to a University of Pennsylvania survey issued last week by the Brookings Institution in Washington.
Stephen King, chief economist at HSBC in London, said economic stagnation had left political leaders increasingly looking for national solutions to international problems.
"It is not so much that nations are becoming deliberately more protectionist. Rather, the cheerleaders for globalization have gone into hiding. They can no longer so easily claim that the forces of internationalization have brought benefits to all," King wrote.
To make matters worse, old-fashioned nationalism is rearing its head, for example over disputed islands in the East China and South China seas claimed by China and a clutch of neighbors, according to the Lowy Institute's Thirlwell.
Trade is a direct casualty: Chinese imports from Japan slumped last year after a renewed flare-up over the contested Senkaku/Diaoyu islands.
"The way the Chinese have played the game, it's quite clear that economics has taken a back seat to strategic policy," Thirlwell said. "This blurring of economics and politics is one of the things I worry about. Does supply-chain Asia still make sense in this new era of more nationalism/economic nationalism?"
The question could become more acute if U.S.-driven transpacific trade talks get off the ground.
China is excluded from the initiative, which it therefore suspects is an integral part of a U.S. military and strategic pivot to Asia designed to counter Beijing's rise.
"So it becomes less and less about what is good for trade and more about dividing lines in the region," Thirlwell said.
Tackling such a sprawling agenda seems a tall order for the fledgling G20, but he said the grouping was the only game in town and should be given time to bed down.
"What's the alternative? Nobody is going to come up with a new club," Thirlwell said. "You can be as cynical as you like about how well it works, but we live in a world where spillovers are large and there is at least some value in trying to get people to cooperate at an international level."
(Editing by Catherine Evans)