In his latest report, ultra-gloomy SocGen analyst Albert Edwards warns of a trade war in 2010, especially if his views of a synchronized global downturn comes to pass.

I think the next 18 months will see major ructions in the financial markets. The consequences

of a double-dip back into recession next year require some lateral thinking. If the carry trade

unwind results in a turbo-charged dollar, any collapse in the China economic bubble will be

doubly destructive to commodity prices. A surging dollar, coupled with China moving into

sustained trade deficit through 2010, could prompt the Chinese authorities to acquiesce to US

pressure for a more flexible exchange rate. But why does no-one expect a yuan devaluation?

Investors seem to have spotted that the global economic cycle may be on the wane. The

ECRI leading indictor for US activity has now slid for five weeks in a row. Recent data such

as the slumping October US housing starts are causing very valid jitters of what will occur

as the turbo-charged fiscal stimulus now starts to abate.

-- Having been in Asia for the last two weeks on business my thoughts turned to China.

President Obama's recent visit there re-opened some uncomfortable issues about

increasing trade frictions in the context of a Chinese currency which most commentators

believe to be hugely undervalued and the US authorities believe to be "manipulated."

-- If we do indeed see the sort of unexpected 2010 synchronised global downturn I

-- envisage, geo-political tensions are likely to increase sharply. And with trade barriers

already beginning to be erected in a recovery, investors should be really concerned about

what might unfold in any renewed global recession. Aggressive competitive devaluation and

a proliferation of trade barriers would become an increasing prospect in 2010.

-- I show below one of my favourite charts of what world trade did in the 1930's. Politicians

reassure us that they have learnt the lessons from that period. Unfortunately, all I see are

more and more protectionist measures being implemented, belying the soothing rhetoric.

Edwards also makes some interesting comments about China:

Our Asian Economist Glenn Maguire has been very right on China this year. I was chatting to

him on my recent visit to the region and he re-emphasised his call that China will be heading

into trade DEFICIT (!) throughout 2010. This is a mega-call and will have major

implications for the global financial markets. First and most obviously is that China will not

be accumulating FX reserves at anywhere near its recent pace. This has implications not just

for US treasuries etc., but also for the pace of Chinese growth itself, as the rise in reserves has

previously been a major stimulus to domestic monetary growth and activity (see chart below).