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 communiqués 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.
