When Barack Obama, Gordon Brown and their colleagues in the G20 conclude this week's summit in Pittsburgh, at least one item in the final communiqué is a dead cert. As they did in London six months ago, and Washington six months before that – and, indeed, at every major summit in living memory – the leaders will state clearly and firmly that they deplore any attempts by countries to lurch into protectionism, promising to do everything in their power to ensure countries do not erect economic barriers and imploring their trade negotiators to get the Doha Round of trade negotiations back on track.
It is ironic, then, that the one area in which governments have truly failed since the financial crisis began is in resisting the tendency towards economic nationalism. According to Global Trade Alert, an authoritative annual study from the Centre for Economic Policy Research in the US, governments around the world have – despite all their promises – implemented around 70 protectionist measures each quarter this year.
Some are "traditional" measures, familiar from the Depression and elsewhere – subsidies for domestic producers or tariffs on imports, President Obama's move to slap a 35 per cent charge on Chinese tyres being a prime example. Such measures are provoking fury, and with good reason: the protectionist spiral into which the world plunged in the 1930s almost certainly contributed to the war at the end of the decade.
However, such visible signs of protectionism tell a fraction of the story. For the shocking truth is this: over the past year, the costs and obstacles faced by exporters have, according to a study by economists David Jacks, Christopher Meissner and Dennis Novy, increased by almost the same scale as in the early 1930s when the US and others were imposing a range of protectionist laws, including the infamous Smoot-Hawley Act.
Partly this is one of the perverse consequences of the financial crisis, which crippled the system of trade credit that underpinned the international flow of goods, making it impossible for some companies to ship products from one part of the world to another. But, far more worryingly, it is also a product of explicitly protectionist measures imposed by countries such as the UK in an effort to save their domestic banking systems from collapse. Most egregiously, these included so-called financial mercantilism, whereby governments, having rescued a bank, insisted that it had to lend far more to domestic customers than business or individuals overseas businesses.
This new protectionism is a different beast from that of the early 20th century, but the result is the same. According to the Bank for International Settlements, the amount of money flowing across national borders has collapsed in a way never before witnessed. Put simply, financial globalisation, which helped power economic growth in recent years, has gone into reverse over the past year. All the more worrying is that it has done so without people noticing.
In just the same way that the financial crisis, which at the time seemed an abstraction to many outside the City, prefigured a broader economic crunch, I fear that this surge in financial protectionism could be the precursor of more deep-seated conflicts. In times of crisis, politicians' first instinct is almost always to protect their own voters. With the next few years set to bring rising unemployment and sharply decreased living standards, the temptation to erect more explicit barriers may become irresistible. The fact that the financial links between nations have already been stripped down will decrease any resistance.
But, again, this is only the thin end of the wedge. One of the bedrocks of global prosperity over the past few decades has been the liberation of capital markets, the fact that money has been able to move freely around the world. While it is something few are currently contemplating, it is no longer improbable that some might impose controls on the amount of cash moving in and out of their countries. Is it so crazy to contemplate the US falling victim to such a temptation if China starts dumping its billions of dollars' worth of American investments?
For anyone with a passing knowledge of economics, this is alarming. I have spent much of the past year writing a guide to economics, and what struck me most deeply was how important international trade is if we are to become more wealthy as individuals and nations. The point of the law of comparative advantage is that by sticking to what they are best at, all countries can become richer; that international commerce is not a zero-sum game where there have to be winners and losers.
But the economic logic is less powerful than this simple point: countries that fight in economic terms, with tariffs or financial barriers, are far more likely to want to fight in physical terms. That the Second World War was preceded by a collapse in world trade was no accident. The difference is that we have credible institutions – the G20, the World Trade Organisation – designed to prevent such a tragedy. If only they would do a better job of it.
Comments: 16
The greatest form of protectionism has been the printing of £175bn (likely to be £225bn this year) of 'funny money' by the BoE. This is a debauchment of the currency and robbery from all holders of sterling assets, including global investors. Who wants to hold a currency that is being printed into oblivion? 'Economic prisons' will be the next course of action which includes exchange controls and punitive asset taxation to trap the remaining taxable wealth. The UK border control force will be not so much interested in those getting in but more likely those trying to get out!
Paul Atherton, Interesting points, but money has no allegiance to any nation.Jews and gentiles have also been criticised for their money practices. Now, China and the East are accused. Perhaps the bigger issue is: 'He who goes a borrowing, goes a sorrowing.' (Benjamin Franklin, inventor, philosopher, Anglophile, and a US Founding Father). On a practical level, I think it would be good if basic finance and economics was compulsory at GCSE level. Politicians and teachers would fight that move. After all, why have an informed electorate when you can have a client State and classroom?
Please sign the EU-wide petition protesting against Lisbon. www.petice.eu/#. Thank you.
The greatest form of protectionism has been the printing of �175bn (likely to be �225bn this year) of 'funny money' by the BoE. This is a debauchment of the currency and robbery from all holders of sterling assets, including global investors. Who wants to hold a currency that is being printed into oblivion? 'Economic prisons' will be the next course of action which includes exchange controls and punitive asset taxation to trap the remaining taxable wealth. The UK border control force will be not so much interested in those getting in but more likely those trying to get out!
The elephant in the room is the increasing influence and power of Islamic business interests in the UK. Muslims don't go to banks and borrow money. They go to their mosque - all registered charities - and borrow it interest free. This enables muslims to buy up properties and businesses during the recession at knock down prices and thus extend their influence and control over native born white British people. Imagine this - 50yrs from now, your grandchildren, unable to afford a mortgage in minimum wage bankrupt Britain, will have to rent a house from muslim landlords. Islamists don't need to declare a jihad aginst Britain to beat us and establish a caliphate - they just need to keep working under the radar to buy up all our assets.
John Doe states the case succinctly, imo, but regarding protectionism: Last year, hypocrite Gordon Brown spoke of 'financial isolationism', yet then bludgeoned good bank Lloyds to take over rubbish bank HBOS, and all its toxic off balance sheet liabilities. Then Brown and Co bully UK banks to lend more, hoping for a return to the unsustainable levels of 2007, the high water mark of a decade of debt, fantasy finance, just before the corporatists in politics and their favoured vested interests got the stuffing knocked out of them when big beast Paulson settled an old score with Lehman's. During the '90s Asian currency crisis, Mahatir of Malaysia was vilified for introducing capital controls which burnt 'hot money' - another smack down for Western corporatists - although he was later praised by financiers elsewhere. I suspect that only the last man out the door will be ruined when exchange controls are introduced in the West in order to stem capital flight by citizens rushing their money abroad into currencies or investments deemed to be safer. Talk about 'thin of the wedge', seen the Tobin tax debate, and a related issue: the UK government's planned �6 tax per internet user, ostensibly to pay for upgrading the network, but also a very useful tool for HMG and HMRC to track currency movements by the little guy. A coincidence that this new proposed tax is due to be introduced before the next election? No. I think not. It will benefit HMG and HMRC whoever occupies Number 10 and 11. Just my opinion. We'll see, won't we?
Both Brazil and South Africa have strong foreign exchange control regulations which may be construed as protectionist in nature, but it could be argued that these protectionist measures spared them the recent pain suffered by more open economies as a result of the credit crunch. Doctrinaire application of the concept of globalisation does not appear to always take into account the complexities of the real world.
Globalism is a fancy word for TREASON. Our politicians care more for New World Order than for 'we the people'. Perhaps we have the politicians we deserve?
Surely this is the old conundrum: if all parties cooperate, all will become wealthier; but if one party cheats, it will become even wealthier.
We don't exactly have free trade now. China rebates taxes on exports to the US while imposing VAT on US imports.
I would love to buy British however as most UK manufacturing has been strip mined by foreign and vested interest today I would be hard pressed.
Interesting summary Edmund but I'm not sure I agree about the "no losers or winners" bit. It's my understanding that what has really driven the world's wealth over the last 100 years is cheap and plentiful energy. We are, for sure, entering a period of highly volatile energy prices that will precede real shortages, at which time we will be able to kiss our energy dependant lifestyle goodbye. It's unfortunate that this will be nipping at the heels of the turmoil that is going to hit us when we start paying down our debt and balancing our economy. Just a thought.
Excessive red tape does the real damage, regardless of whether the transaction is national or international. Filling forms costs small companies more than big companies. Big companies have the resources to hire specialist teams and create bespoke software to streamline compliance with regulations. Small businesses don't have this luxury - often the director has to waste time filling forms - time which could be spent making money. With such a barrier to entry, big companies can be complacent about market share. They lose the incentive to innovate and improve. They are free to spend their energy cost cutting, and firing people, to maximize the Director's bonus and owner's dividends.
The bedrock of the "prosperity" of the laste 30 or so years has been the pulling forward of future demand by taking on ever more debt. Sure, globalisation and the increase in global trade had a small feedback effect but the causation stemmed from the voracious western consumer and the tricks of the trade which put the cash into his hands.
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