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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@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