The perils of protectionism
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.
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.”
Starting a trade war with “Buy America”
–- Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. –-
When Congress inserted “Buy America” protectionist provisions that required some goods (such as steel, cement, and textiles) financed by the stimulus bill to be made in America, our government invited a trade war with important economic partners. Now China and Canada are imposing their own protectionist regulations, potentially destroying well-paid American jobs in the export sector. Other countries may follow suit.
This week China reported that the government now requires stimulus projects to use domestic suppliers when possible, even though in February it promised to treat foreign companies equally. The Chinese $585 billion stimulus package has resulted in a World Bank growth forecast of 7.2% for China this year, far above other industrialized countries.
And on June 6 the delegates at the Federation of Canadian Municipalities passed a resolution calling on “local infrastructure projects, including environmental projects such as water and wastewater treatment projects, [to] procure goods and materials required for the projects only from companies whose countries of origin do not impose trade restrictions against goods and materials manufactured in Canada.”
The tragic losers of “Buy America” are free trade agreements and potential job growth in the American economy. Seductively, “Buy America” promises workers they can have it all — cheap goods from China, oil from Canada, as well as protection from global competition. But real life just doesn’t work that way. In reality, “Buy America” is shorthand for fewer jobs as other countries retaliate.
Many markets no longer have national boundaries but global reaches. America sits at the center of global markets for technology, equipment manufacturing, finance, banking, fashion, and advertising — to name but a few. When international markets expand, America grows. When barriers are erected to trade, jobs — and also wages —shrink.
You want to protect a small number of jobs that pay more than $100,000/year. It’s a reflection of who you are and your view of America.
In short, you’re clueless. The last time America was a good place to work was during the Johnson administration. Many factory workers had vacation homes. Jobs were plentiful, NOTHING made in mainland China was for sale in the United States, we made T-shirts here in America.
Sadly, you won’t lose your job protecting a small number of wealthy people’s income, but if you don’t get a clue, you won’t succeed in doing it.
What Asia needs from the G20 meeting
Jaspal Bindra is Chief Executive, Asia, for Standard Chartered Bank. The views expressed are his own.
Asia has come of age. When leaders from the Group of 20 nations converge in London, Asia’s rising powers – China, India, Korea and Indonesia – will be sitting at the global high table to decide on ways to reshape the world’s financial and economic order.
There are expectations that the meeting will include concrete steps to revive economic growth, a boost in funding for the International Monetary Fund, and an understanding on the new financial architecture to restore trust in the financial system.
Asian policy makers are looking for two other critical assurances from the meeting: one, that the developed countries will keep their markets open; and two, that global capital flows needed to finance trade and investment will remain unchecked.
No one doubts the difficulty of reaching consensus. But the stakes have never been higher.
Amidst the frenetic attempts by individual governments to tackle the biggest economic crisis since the Great Depression, it is easy to forget that the progressive dismantling of barriers against international trade and investment contributed to the biggest economic boom the world has seen.
More than 200 million jobs were created worldwide between 2000 and 2007, according to the Institute of International Finance, and millions of people in the developing world were lifted out of poverty, as a result of free flow of capital, goods and services.
the G20 in reality should be addressing the reshaping of eco-systemic approaches to global governance with far greater urgency than the reshaping of economic governance of the global markets.
within contemporary economic modelling a value is placed on a mature tree or a school of tuna in isolation of its relationship to the entire ecosystem. however the ability of the whole far exceeds the sum of its parts.
all the myriad of parts are necessary for the overall performance of the entire system, a system which we humans are intrinsically a part, not separate from.
removing parts of the system by overhunting or excessive felling of rainforest disturbs the whole system, irreversibly.
humans are not existing in isolation from these systems. therefore much greater care should be exercised when disturbing the equilibrium of ecosystems. they are all sensitive and absolutely essential for our continued survival.
we should be continually relaxing and refining the resources extracted from the natural environment so as to minimise impacts on the balance of the systems. benchmarks have to be reappraised with an objective view on a commitment to future generations of humans that will be just as determined to survive as we are, hopefully within the context of dynamic ecosystems.
healthy, flourishing ecosystems make good sense if we have the least concern at all for the rights of future generations. do we have a right in 2009 to make a determination on the sustainability of life in the year 3009.
our contemporary viewpoints on economic governance have brought mankind to a perilous juncture, where the environment is finding new equilibrium;no one can ‘peer through the mists of the future’ to discern what new forces will be invoked as the earth rebalances.
now is the time to turn our attention and synergy back to the nourishment, care and nurturing of our immediate environments & get that right, first. then other aspirations can be fulfilled.
mankinds entire approach to the earth has to be
re-engineered, keyed to establishing dynamic harmony with natural environment, not continually attacking it.
G20 should be pragmatic about protectionism
– Paul Blustein is a journalist-in-residence at the Brookings Institution. He is writing a book on the World Trade Organization, which will be published in September. The views expressed are his own. —
Telling young people to abstain from sex is “not realistic at all” — new mother Bristol Palin, 18.
The wisdom of Ms. Palin should be borne in mind by the leaders of the Group of 20 nations at their April 2 summit when they turn to trade.
The meeting comes at a time when worries about protectionism are mounting, because a number of countries have raised trade barriers and enacted other quasi-protectionist measures.
It is tempting to say, as many commentators have, that the G20 should vow to shun all new acts of protectionism, including any tariff-raising or more subtle actions such as “buy local” provisions in government stimulus programs. Unfortunately, such blanket pledges will be no more credible than teenage abstinence campaigns. The G20 must be ambitious on trade, but it must also be practical. Minimizing long-term damage to the trading system should be the overarching goal.
The G20’s effort on trade at its first summit last November was loaded with high-mindedness—and, as it turned out, hot air. The leaders said they would “strive to reach agreement” in 2008 in the World Trade Organization’s Doha Round of trade negotiations, which have dragged on for seven years. And they promised to “refrain from raising new barriers” for 12 months.
Alas, violations of both the spirit and letter of the declaration materialized within days of its promulgation.
I would suggest that anyone who advocates protectionism and tariffs would do well to Google “Smoot-Hawley Act”…
Ask the World Bank President
Robert Zoellick, President of the World Bank, and a man who believes that 2009 will be a “dangerous year”, will be speaking on March 31st and has agreed to take questions from Reuters readers.
Zoellick has been outspoken during the current economic crisis predicting the first shrinking of the economy since the ’30s, warning that increased government spending will simply create a ‘sugar high‘ until banks’ toxic assets are dealt with properly, and urging a tougher stand against protectionism.
But the World Bank’s primary focus is on helping developing nations and alleviating poverty. Earlier this month it published research showing that the spreading crisis will push 46 million more people into poverty in 2009 on top of 130-155 million pushed into poverty in 2008.
With the London summit of the Group of 20 nations on April 2nd fast approaching what do you want to know about the World Bank’s role in shoring up the world economy and helping poorer nations? Use the comments section below, or use the #askwb tag on Twitter, and I’ll get as many of your questions to Robert Zoeliick as possible.
UPDATE: This event has now taken place and you can view the questions we put to Robert Zoellick in the player below. We have no means to pass on any further questions to the World Bank but you are welcome to add your comments on the discussion thread below.
How closer have we come to eliminating world poverty and creating financial equality among humans on our planet according to the goals of your institution?
What steps are you taking to correct the errors and to improve this necessary vision?
Quantitative and qualitative speaking according to factual statistics what have you really done to increase the per person income and not the average or GDP of countries since the insertion of your organization?
How come there is more and more poverty and more and more people making less and less and a few ones getting richer?
What is not working with your old proposed model and what are you going to do about it now?
Buck-passing augurs ill for G20 summit
– Paul Taylor is a Reuters columnist. The opinions expressed are his own –
The foreplay to next month’s G20 summit is degenerating into a buck-passing exercise rather than crafting a Grand Bargain to save the world economy and regulate capitalism.
The industrialized powers do not agree on how to arrest the steep slide in output, how to handle collapsing banks, how much market regulation is needed, how to reach a world trade deal and prevent protectionism, or how to redistribute power to emerging nations in exchange for their money.
At this rate, the April 2 London summit — U.S. President Barack Obama’s global economic debut — is highly unlikely to restore confidence.
The United States says other countries must follow its lead and spend more on a fiscal stimulus to boost demand. It is turning a deaf ear to calls for radical financial regulation. Euro zone finance ministers, anxious to preserve the budget discipline that underpins their common currency, are refusing to pile up more debt before their current stimulus efforts have taken effect.
The EU seeks a doubling to $500 billion of the International Monetary Fund’s war chest to bail out countries in trouble, including in eastern Europe, and it wants China, Saudi Arabia, Russia and others to pay most of the tab. Yet there is little sign the Europeans are willing to accept a diminution of their IMF seats and votes to make room for the emerging economies.
Washington and London are resisting pressure from France and Germany for mandatory regulation of all financial markets and institutions, including hedge funds and private equity.
Unfortunately Paul Taylor is probably correct in his assessment that the divisions among G20 members will lead to more show than substance at the London G20 meeting.
One of the tragic short comings of Western G20 members is their refusal to acknowledge how the balance of economic power is shifting from West to East. We want Asian nations to contribute more money to the IMF but don’t want to give them more representation with important leadership positions at G20, IMF or anyplace else.
In order to receive more cooperation from Asian nations the West will have to reconcile the present dominance of the West within G20 and elsewhere. If each nation acts only in its own self interest financial conditions could deteorate very fast indeed.
Protectionism risks rise in 2009-2010
– John Kemp is a Reuters columnist. The opinions expressed are his own –
Commentators are focused on the risk countries will respond to the worldwide slump in demand by resorting to protectionist measures (either competitive devaluations, tariff rises or other trade barriers) in a mutually self-defeating attempt to reserve what remains of shrinking demand for domestic industries — leading to trade wars, a reversal in the trend towards global integration and a fall in living standards.
Parallels with the 1930s abound. But the tariff wars of the 1930s belong to a vanished world of fixed exchange rates, militarism and failed multilateralism. The tariff history of the 1930s is not a good parallel for today’s world.
The real risk is a more insidious undeclared trade conflict based on rises in applied rates, non-tariff barriers, bad faith, and an upsurge in trade defenses as countries try to “allocate” scarce demand and placate industries and workers under particular pressure.
RAISING APPLIED TARIFF RATES
Each WTO member has a schedule of commitments in which it has agreed to “bind” the duty levied on particular items at no more than a specified rate.
The tariff binding is a maximum; applied rates are often below it, in some cases by a substantial margin. The differential between applied rates and bound rates is a measure of how far countries could raise their tariffs in practice without violating their WTO commitments.
Reading this column has strengthened my opposition to these global organizations. As it applies to America, we should be providing for ourselves first. We are fortunate enough in our country to have the means to do it. We can feed ourselves and manufacture goods here at home for domestic consumption. We have the resources, intelligence, and manpower to do so. We can “fix” our currency to solid commodities that WE produce here at home and make it valuable to Americans most importantly first. We once fought like heck to remove the cancer that ruled over us from abroad who would not hear our cases nor defend our standards. Who held control over both our means and our ends. Why are our own people so eager to internationally bind America to another entity? Do we (they) really fear the world that much or do we not have enough trust and faith in each other that we can do a good job? It wasn’t that long ago that we did provide for ourselves.
politics is never about politics!