The perils of protectionism

By Gordon Brown
October 27, 2011

By Gordon Brown
The views expressed are his own.

Next week’s 2011 G20 meeting has the power to write a new chapter in the response to the economic downturn. But every day, as nations announce currency controls, capital controls, new tariffs and other protectionist measures, the G2O’s room for maneuver is being significantly narrowed. Already the cumulative impact of a wave of mercantilist measures is threatening to turn decades of globalization into reverse, returning us to the economic history of the 1930s, and condemning at least the western parts of the world to a decade of low growth and high unemployment.

Three years ago when the financial crisis first hit, the G2O communiquĂ©s were explicit in warning of the dangers of a new protectionism. Led by the head of the World Trade Organization (WTO), Pascal Lamy, we embarked on a forlorn attempt to use the crisis to deliver a world trade deal — and were frustrated by an irresoluble dispute on agricultural imports between two countries, India and the USA. But now, in the absence of any co-ordinated global action, member countries have been retreating into their national silos — and the trickle of protectionist announcements threatens to become a flood. Switzerland led costly action to protect its overvalued currency and has been followed by currency interventions in Japan (with perhaps more to come), India, Indonesia, and South Korea. Brazil, which had itself warned of currency wars, then imposed direct tariffs on manufactured imports — a hefty car tax designed to protect its own native auto industry against emerging market imports. Other countries are now considering mimicking them. Capital controls are also now in vogue, and of course the U.S. Senate has just voted to label China a “currency manipulator.”

The 2011 WTO report, just published, warns of divergences in regulatory frameworks in preferential trade agreements. And in the next few days the WTO will release its submission to the G20.  It will note  a  rise in  trade-restrictive measures and describe the outlook ahead as “less restraint in the adoption of new trade-restrictive measures and less determination to dismantle existing ones.” Perhaps as worrying  is the growing resort to what I call “home country bias.” Today French banks are selling off their foreign assets and focusing their large portfolios on France itself. French banks have 8 trillion euros in total assets and if the plan is to run them down at 5 percent a year, then by 2014 we will see a 1.2 trillion-euro reduction in investments outside France. European bank liabilities are on the order of 32 trillion euros and when, as we can expect, the same mercantilist approaches to liquidating assets spreads to Germany, the Netherlands, and beyond, growth will be put at risk.

When in 2008 the financial crisis first hit us, money started to flow out of Eastern Europe, whose banking system is dominated by French, German, Italian, and Austrian banks. To soften the impact, we put in place a European Union/IMF guarantee that was sufficiently robust to prevent a massive outflow of bank funds. No similar guarantee is now available and,  faced with capital flight, growth forecasts for Eastern Europe in 2012 are now half what they were.

The process of deleveraging with a home country bias is not restricted to European banks. Many American banks are now deserting Europe and, as the home bias becomes more pronounced, we risk a further round of tit-for-tat actions. This protectionism is the undesirable but inevitable result of a failure of countries to co-ordinate economic policies out of the crisis. Since a high point of cooperation in 2009, we have failed to secure not only a trade agreement but both a climate change agreement and the implementation of G20 decisions to create global financial standards, including a much needed global early warning system.

The new protectionism will make people question whether an era marked by open global flows of capital and the global sourcing of goods is sustainable and whether the very idea of a “global village” of irreversible economic interdependence and integration is now at risk. The biographer of Keynes, Robert Skidelsky, has written in apocryphal terms of “a disorderly, acrimonious retreat from globalization [that] is bound to overshoot its mark, reviving the economics and the politics of the 1930s; but leading in an era of nuclear proliferation, to consequences even more terrifying.”

At a time of crisis nations want protection, shelter from the storm. But given that trade protectionism does not, in the end, protect anyone, the G20 should resolutely fight the protectionist forces with all the power we have. Indeed the evidence that still points to growing interdependence between emerging markets and the advanced world — and not to a decoupling of east from west — demonstrates the risks of protectionist policies.

Of course interregional trade is rising fast, south-south trade now represents 18 percent of world trade and, like inter-Asian trade, has doubled as a share of world GDP.

Yet, until the crisis, every 1 percent increase in U.S. growth brought a 5 percent growth in Chinese exports, demonstrating each continent’s dependence on the other. Some Chinese experts suggest a post-crisis change, that for every 1 percent fall in U.S. growth there is less than a 1 percent fall in Chinese exports — but emerging market trade is still very much part of a global supply chain through which two thirds of Asian exports end up coming west.

Today the west (the USA and the EU) produces only 40 percent of the world’s goods and services but consumes 55 percent of them, ensuring Asian producers and western consumers depend on each other. And the way the markets in the east are instantaneously affected by events in the west — and vice –versa– suggests people still believe we are mutually dependent on each other.

So the G2O does face a clear choice between condoning a sharp and dangerous retreat from  globalization, or fighting it with better global economic co-ordination.  A world trade agreement eludes us. With elections in America and France in 2012 and a change of Chinese leadership in 2012 no trade deal is likely to get off the ground. But it is right to continue to seek a global growth pact. With east and west in a mutually dependent economic relationship, China, America, and Europe should co-operate on co-ordinated policies — higher Chinese consumption, more western investment in infrastructure — that can sustain growth.  We should discuss necessary reforms to the world’s monetary system, aiming to end eras of current account imbalances, and we should work through plans for better global financial supervision that can avoid a race to the bottom in bank standards.

27 comments

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Why does Reuters continue to give space to this discredited politician?

Posted by AMB2 | Report as abusive

Hasn’t even the IMF come around to recognize, at least in limited circumstances, the legitimacy of capital controls?

If Mr. Brown wants to bring up Mr. Keynes and his fears regarding protectionism he may way to be complete by stating what is known about Mr. Keynes: he was in favor of capital controls! This was clearly an outcome of Bretton Woods.

Posted by LukmanAhmed | Report as abusive

Mr. Brown,

I can see how protectionism is a threat to productivity, and how globalisation (in competition and supply diversification) can provide a huge boost to productivity. I also agree wholeheartedly with your enthusiasm for global cooperation in these matters.

However, protectionism is not the only problem. Globalisation presents its own challenges. Free trade or reduced-tariff agreements have been unjustly completed between countries whose standards of social care and human rights are dissimilar (to put it mildly). This is a fundamental affront to the rights of the working classes.
In England, where a mild and consensual rebalancing of our economy was required in the 1980′s; instead, working-class livelihoods were destroyed en-masse, sacrificed on the altar of short-term overall GDP; by Margaret Thatcher (whose ideological goals included breaking the backs of the unions); and this injustice was not fully rectified under her successors.
Only now, are those leading the United Kingdom beginning to acknowledge the resulting imbalance in the U.K. economy, which was once a manufacturing powerhouse full of skilled craftsmen, but now (for all its high-technology industry and service-sector leadership), would do much better if a part of our former manufacturing base was restored. Even the Conservatives are now recognising this.

===Globalisation of trade was premature, in the absence of more widespread and more globally harmonised respect for human rights including education and healthcare provision.===

With the increased global productivity that globalisation brings, certain other things need to be changed in parallel in order to keep the global economy in balance:

* The WTO needs to have, built into its treaties and responsibilities, concrete methods of deciding whether a currency is “overvalued” or “undervalued”. This might be based on PPP (Purchasing Power Parity).
* The WTO needs to have, supported by other globally respected organisations, concrete measures of compliance with universally recognised human rights, and quantifiable methods of calculating support for healthcare provision. Workers rights, or in other words, the total costs of employment; should be taken into account in WTO.
* Countervailing tariffs should be written into the WTO agreements, and should automatically come into effect upon a member country meeting certain criteria. Decisions on countervailing tariffs between WTO member countries should not be motivated by politics and brought to the WTO as an after-thought: rather, sound principles and agreed methods should be implemented, to keep the system in balance and prevent disputes.
* Market disruptions (sudden changes in pricing or in supply and demand) might be further taken into consideration, as a reason to introduce short-term stabilisation tariffs (similarly to how the United Kingdom has now unilaterally introduced a stabilisation tariff for fuel sales).
* The global system of reserve currency may need some attention as part of this diplomatic blitz. (I’ll be hated by Americans for saying this, but this is surely one of the biggest sources of instability right now: American politicians are held hostage by the American populace, to devalue their dollar debts away; and foreign governments are held hostage by American dollar policy, to devalue their own debts away. The investment won’t return until the value and integrity return.)

These are my suggestions. I simply don’t agree with Robert Skidelsky: I believe we have a very bright future ahead of all of us, if we can only agree on some basic principles of fairness…

One other thing. We’re going through a technological transition (an information revolution) quite similar to the industrial revolution. Where are the measures for helping those whose jobs are being gradually made obsolete by people like me (a software engineer)? Where are the retraining and education initiatives, that were so slow in coming during the “get on your bike and look for work” Thatcher/Tebbit era?
I’ve been looking for some fore-sight among world leaders, on this issue; but I’m not seeing any. This is one of the key drivers in the increasing difference between rich and poor: the cornering of world trade arbitration by an oligopoly of global high-technology suppliers. The only way to counter-balance the unfair advantage of these oligopolies is to reset world economics on more socialist principles (the same sort of rebalancing that had to occur after the industrial revolution). WHERE is the VISION? I’m not seeing any. Can you please do something about it, Mr. Brown?

Ultimately, when globalisation has succeeded on fair and equal terms for all; we will all be better-off for it: every one of us. Until we have agreement on how to do this, globalisation MUST be back-pedalled.

Matthew (a computer science graduate from England).

Posted by matthewslyman | Report as abusive

A rather interesting commentary especially given his previous attempts to drape himself in the Union Jack and proclaim ‘British Jobs for British Workers’.

Posted by PRRob | Report as abusive

Matthew (a computer science graduate from England)has an amazing grasp on world economics. I would add one comment: Globalization will fail without ‘fare trade’ and ‘balanced trade’. Globalization also requires that all play by the same rules and that the rules are enforced. Without immediate enforcement protectionism becomes the only defense/response possible.

Posted by Gerald60 | Report as abusive

Brown needs to go back to parsnip polishing – after the staggering damage he & NewLieMore inflicted on the UK.

He seems to conveniently forget that NewLieMore inherited an economy in surplus & left it bankrupt!

He sat and watched the banks run riot, he wrecked pension, wrecked manufacturing, sold off gold for a pittance, surrendered to the Greater European Empire..

Now the working folk of the UK and their CHILDREN are paying for his colossal incompetence!!!!!

Posted by mgb500 | Report as abusive

Well said, matthewslyman.

Posted by LEEDAP | Report as abusive

There certainly are perils associated with protectionism for those nations who’ve been the beneficiaries of the enormous global trade imbalances – namely Asian nations and the EU. But for the U.S., who has financed their economic boom times with a huge trade deficit, there is nothing but benefit to be derived from the use of tariffs to restore a balance of trade. If the rest of the world fears such a move, they can simply start buying as much from the U.S. as we buy from them, as they’ve long promised to do without ever following through. Otherwise, it’s high time for the U.S. to act.

Pete Murphy
Author, “Five Short Blasts”

Posted by Pete_Murphy | Report as abusive

One cannot have “equal” trade when economies are so unequal. I actually do not see any solution to this. Eventually developing nations will have their standard of living upgraded to closer to the current developed nations, but labor costs will always be cheaper in developing nations. So long as the world insists on increasing population (keeping developing nations poor per capita), there can never be equal trade.

Nations remain sovereign, and the WTO, or any “multi-national” body like the UN, cannot impose sufficient controls to change the situation. Those of us in developing countries need to find ways to make money that involve things other than simple manual labor. Oh, there will always be a market for some services that cannot be done abroad, but in general our economies have to shift. This has not yet occurred.

Posted by stevedebi | Report as abusive

“Three years ago when the financial crisis first hit, the G2O communiqués were explicit in warning of the dangers of a new protectionism.”

Of course, the 1% who have been profiting grandly from cross border flows of goods and capital would give such warnings. The 99% who are suffering from the boom/bust cylces caused by capital freely sloshing around the globe feel differently.

Posted by tcolgan001 | Report as abusive

Routers gave a UK politician who is part and parcel of the blow up of Anglo-Sexton economics space to offer ‘warnings’, even suggestions on solutions and how to proceed with the future.

The hypocrisy is not with Routers, but with Mr Brown. Maybe spending days out of power with his buddies of ex-Northern Rock is getting too boring. Maybe Mr Brown enjoy insults.

For me, I just want to point out to Mr Brown that, if you are so smart, why don’t you run for PM again? Or run for office in any major economics institution of stature?

Posted by TomKi | Report as abusive

The world system far from being perfect. Booms and boosts are not new. Kontrattiev, Schumpeter, Jaggler..All racked their brains to understand them.

Given the change of the position of countries of East and West, this major situation may give chance to countries to question the system.

On one hand, there are unjust rules of world trade system imposed by developed coutries, and on the other hand, there is China and its irregular style of doing business. Harmful toys, abuse of workers in textile factories, outlawed methods of trade, creating informality and intaxability in the national markets.

I hope we will have to discuss all these problems, thanks to the current vogue of contraction.

Posted by hallofids | Report as abusive

Perhaps each nation should have a trading account based on its ability to pay for goods over a defined period. The method of payment could be on a reserve currency of choice between the Dollar, Euro, Yen, Yuan and UKpound. The exchange rate between these is fixed on an annually agreed basis and currency markets restricted in speculating on their values. Alternatively bring back the gold standard using the above currency units which must be backed up by gold reserves and an agreed gold price fixed annually.
This would stop Countries fiddling the value of their currencies to inflate their way out of excessive spending. Also stops the currency manipulators form holding theirs at low values to give their exports an unfair advantage.

How? That is not for the likes of me.

Posted by TommyUK1 | Report as abusive

@ Matthew (a computer science graduate from England)

I could not agree with you more

My thesis (2005)

The system is, because of our aspiration to increase our prosperity and hence reduce cost” – the financial economy-, still consumer driven (user in respect of cost and investor with respect to returns) – the engine- Because of this it is eminent that employment in the manufacturing industry and, in particular as a result of the revolutionary developments since the mass implementation of the use of Internet, which in relevance can be compared to the invention of the wheel, also the industrialized, commercial- administrative service by the workings of the market (the absurd diffrences in similar work – the social economy- with the low cost countries, up to about 1000%, -the fuel-) cannot but leave the shores of our –so far- properly paid societies – the decline-

Jens, international businessman (not in finance) for 50 years……..

Ity was all there presented by Keynes in Bretton Woods, but the, then, powerhouse of the world just picked the things they liked…did not think any further, now they (we) have to face the problems.

Posted by Checksbalances | Report as abusive

@stevedebi
Things are completely different from any time before in the economical history of the globe, we have got an extremely effective transport an communication net work, we have got a country which is in principle dictatorial (Marxist)which led itself be fed through our (rather messy) capitalistic system.
They control their economy, we don’t…that’s the problem, a possible answer:

A kind of value added tax (lost-jobs duty) on the FOB value of -processed-food- and industrial consumer and investment goods from the (Asian) fast growers. This tax however should be reviewed annually, being held against exchange rates and growth of average income in the main exporting –low wage- countries and hopefully amended downwards as time progresses, this will keep us in a competitive shape and may-be have a positive effect on the growth of income over there. This tax is to be downwardly corrected as currency values and incomes rise in comparison to ours. This does not create an unbalance because exported (outsourced) and local industries will be charged similarly.

Another alternative would be “Fordisme” http://en.wikipedia.org/wiki/Fordism (Higher living wages) in the emerging markets, substantial rises in income in the developing and fast growing countries (a minimum wage on twice two three times the current level)that would give the economy in their own countries a gigantic boost and would make it more interesting for our businesses to consider returning home….

Posted by Checksbalances | Report as abusive

Don’t forget that 43% of the total export of China in 2010 came from Western and Japanese companies i.e in totaal 1600 billion dollars of which 690 billion (costprice!!)is for the account of exported work..imported money….for whom…of course through competition this pays for the devaluation of labor. So…that should be changed. I mention China, but it is true that that is only part of the picture, the consumer products that we import from there are quite often composed of stuff from ..mostly… other developing countries.

And of course we also import directly from the Philippines, India, Brazil, Vietnam, Korea, the Asian tigers…..

Posted by Checksbalances | Report as abusive

@TommyUK1
This is what Keynes thought of this..and how the Americans…shortsightedly…. reacted to it:

In case of balance of payments imbalances, Keynes recommended that both debtors and creditors should change their policies. As outlined by Keynes, countries with payment surpluses should increase their imports from the deficit countries and thereby create a foreign trade equilibrium. Thus, Keynes was sensitive to the problem that placing too much of the burden on the deficit country would be deflationary.
But the United States, as a likely creditor nation, and eager to take on the role of the world’s economic powerhouse, balked at Keynes’ plan and did not pay serious attention to it. The U.S. contingent was too concerned about inflationary pressures in the postwar economy, and White saw an imbalance as a problem only of the deficit country.(Wikipedia)

Posted by Checksbalances | Report as abusive

So, one could say that, given the current …ultra-liberal…circumstances the financial economy is the engine, and the imbalance in income the fuel, for the decline of the social economy

Posted by Checksbalances | Report as abusive

Oops…I nearly forgot one very important thing, this obviously puts me completely in line with the “occupy” movement…I wholeheartedly support them!

Posted by Checksbalances | Report as abusive

The bigger danger is that Broon is an adviser to the WEF. This man ended booom and buust?? He was a pseudo communist non-elected Prime Minister and developed a typical red overmanned civil service and taxation burden on th UK. God help the WEF if they ever listen to him.

Posted by Cynicalsam | Report as abusive

@Cynicalism

Yes I still remember the announcement from labou, I do not remember whether it was Mr. Blair or Mr. Brown stating on television that boom and bust now were a thing of the past…if only they knew…..-what Thatcher and Reagan had caused-. Ultra liberalism in a capitalist society with slave labor is to wreck the lower and middle classes.

But, we ARE amidst some busts now, so we have to find a solution to survive, the only solution is work, but the dualism between financial and social economics, promoting low cost production for high priced markets will lead us to the opposite direction of discovery, we must address THAT problem.

Posted by Checksbalances | Report as abusive

Mr. Gordon Brown must be smoking that laissez-faire (cocaine) capitalism again. Oh how short the memory of President Clinton’s attempts to flood the Mexican markets with cheap foodstuffs from the USA, leaving in the wake, broken, bankrupt Mexican farmers..who, by the way, jumped over the border fences, entering our country illegally in search of work!

Posted by elmerfudzie | Report as abusive

@Elmerfudzie,

Yes indeed “laissez-faire” the survival of the strongest…moneywise that is….

Posted by Checksbalances | Report as abusive

A slight correction about “protectionism” (tariffs and import duties) not protecting anyone: they do not protect the to 10% by income. That does not mean they do not protect the 90% majority of Americans.

Unlike Britain, the USA is a continental country with large resources and skills, but with a Government which has proven itself unable to negotiate a square deal for American workers. Unable and unwilling. The pocket of the common man is easily picked by politicians, while the must ask for money from the rich. This is corrupt. This is unacceptable. And the American people cannot afford to pour our national income down the Middle Eastern rat hole wars and thus cannot afford to wait 100 years for our Government to decide to get out.

Our Government needs to institute heavy import duties, to pull all American troops back to American territory, and to begin an anti-corruption reform to eliminate bribery from our political system. They will not do any of these things. So it is the task of the American people to change our entire political system to one that will.

Posted by txgadfly | Report as abusive

Mathew Thank you, and please get into politics.

Posted by Gillyp | Report as abusive

@Gillyp,

Yep, problem is politics is not about politics (the representation of people) anymore but there seems to be just one policy all over the board, representing markets, markets and markets…se Question Time last thursday Peter Hitchens was in my opinion the only one with the right attitude towards an electorate. I was furthermore flabbergasted by the way that according to a couple of members of the panel religion apparently has turned into something that is used as a cover against, rather than a believe …in a better future….FOR HUMANITY (rather than for capital).

Posted by Checksbalances | Report as abusive

politics is never about politics!

Posted by Arbrene-Hussain | Report as abusive