Protectionism The Real Enemy

I started to read the special Christmas double edition of The Economist last night (I managed to find a copy at Cromwell Paper Plus).  The first Leader is a story entitled Fare well, free trade.  It talks about how we are seeing a frightening combination of forces – a contraction of both capital investment and world trade.  The shifting of both trade and capital flows into reverse has not happened for a generation.

The article also deals with a factor that worries me enormously, the ability of world leaders to say one thing on the international stage, and to act very differently at home

In many countries politicians’ fealty to open markets is already more rhetorical than real. In November the leaders of the G20 group of big rich and emerging economies promised to eschew any new trade barriers for a year and to work hard for agreement on the Doha round of trade talks by the end of December. Within days, two of the G20 countries, Russia and India, raised tariffs on cars and steel respectively. And the year is ending with no Doha breakthrough in sight.

As economies weaken, popular scepticism of open markets will surely grow. Among rich countries, that danger is greatest in America, where grumbles were heard long before recession set in. The new Congress, with bigger Democratic majorities, has a decidedly less trade-friendly hue. Barack Obama’s campaign rhetoric left an impression of a man in two minds about trade, which he has since done nothing to dispel.

And to add into the mix trade distorting policies are beginning to abound

Politicians from Washington to Beijing are being pressed to help troubled industries, regardless of the consequences for trade. A bail-out of Detroit’s carmakers, whatever its final extent, will be a discriminatory subsidy. As China’s exporters go bust by the thousand, industries from textiles to steel have been promised handouts and rebates. Subsidies will beget more subsidies: Nicolas Sarkozy, France’s president, says that Europe will turn into an “industrial wasteland” if it too does not prop up its manufacturers. They will also invite retaliation. With China’s bilateral trade surplus at a record high even as America’s economy slumps, Congress will not take kindly to Beijing’s bolstering of its exporters.

The Economist suggests a policy prescription which I can only endorse

Add all this together and it is hard for a free-trader not to worry. So what is to be done? The first requirement is political leadership, especially from America and China. At a minimum, both must avoid beggar-thy-neighbour policies. Second, a conclusion of the Doha round would help. A deal would reduce the risk of broader backsliding by cutting many countries’ bound tariffs—and it would establish Mr Obama’s multilateral credentials. Third—Doha deal or not—is greater transparency. A good recent idea is that the WTO publicise any new barriers, whether or not they are allowed by its rules.

But The Economist misses one new factor which is probably more worrying than anything else it talks about.  That is the prospect of new instruments being introduced to keep US and European industry internationally competitive after cap and trade or carbon taxes are introduced as a response to climate change.  My fear here is that these policies will spark a trade war which will threaten to future of the WTO rules based system.  Avoiding such an outcome will be one of my key themes for the year ahead.


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One Response to “Protectionism The Real Enemy”

  1. adamsmith1922 Says:

    Charles, Timely comment. I had posted a few days ago on this matter referencing the Economist piece

    I was especially taken by the conclusion.

    You are of course right on how ‘green issues’ are being used to enable protectionism, especially the in Europe.

    Plus I should wish to see you or someone rebut nonsense such as I referred to in this post on a recent DomPost article

    The Economist also has an article in the same issue on Smoot-Hawley which is worth a look

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