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International trade and emerging protectionism since the crisis

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In Brief

2009 was a crisis year for international trade, which suffered its steepest decline since the 1930s. Protectionism returned, reversing an almost three-decade trend of trade liberalisation.

But, contrary to expectations, it has not returned with a vengeance, rather creeping to the surface in subtle ways. Time, therefore, to take stock of trade policy after the crisis, and consider its outlook at the beginning of this century’s second decade.


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The Goldilocks global economy before the crisis

The pre-crisis global economy enjoyed golden conditions. The quarter-century up to the crisis saw the fastest increase in economic growth, globalisation and prosperity in history. International trade increased sevenfold between 1980 and 2008, outpacing the increase in world GDP in the same period. World foreign direct investment (FDI) far outpaced both, increasing almost thirtyfold. The global economy had its ‘Goldilocks’ moment in the half-decade from 2002. Growth, trade and FDI soared to ever-greater heights. Financial globalisation soared even higher.

Rapid globalisation had two driving forces: technology and policy liberalisation. The West had its Reagan, Thatcher and European Single Market revolutions in the 1980s and early 1990s. Developing countries liberalised massively and integrated into the global economy in the 1980s and ‘90s, with ex-Soviet economies following from the early 1990s. Average tariffs in developing countries fell from about 30 per cent in 1985 to just above 10 per cent in 2005.

The global economic crisis and deglobalisation

The financial crisis that exploded in September 2008 transformed a benign global political and economic context into something more malign. A sharp contraction in global growth ensued. This was reinforced by even sharper contractions in trade, FDI and other channels of globalisation. The world suffered its worst ‘deglobalisation’ since the Second World War.

Contractions in growth, industrial output and trade bottomed out towards mid-2009, followed by a halting recovery. By year-end the latter remained anaemic and uncertain in the West, but Asia rebounded quickly. China led the Asian bounceback, helping to lift other east-Asian countries out of the crisis, and India recovered fast as well. Thus the crisis seems to have accelerated the shift of economic gravity to the East. It has given rise to sunny Asian optimism, which contrasts sharply with Western gloom. Nevertheless, the global economic outlook remains uncertain, probably with turbulent times ahead. That Asia cannot escape. Moreover, Western and Asian – notably Chinese – policy responses to the crisis are storing up a lot of trouble (of which more later).

To put flesh on the bones of crisis-induced deglobalisation: The last IMF World Economic Outlook forecasts a decline of 1.1 per cent in world GDP in 2009, split between a decline of 3.4 per cent in developed economies and an increase of 1.7 per cent in developing economies. The Asian Development Bank forecasts growth of 4 per cent in developing Asia in 2009, going up to an almost Tigerish 6.4 per cent in 2010. China is expected to post growth of 8 per cent or higher, and India 5-6 per cent, in 2009.

Deglobalisation has been most dramatic in finance. International capital flows shrunk by 82 per cent in 2008, and global wealth shrunk by USD 29 trillion in 2008 and the first half of 2009. The IMF forecasts the volume of international trade in goods and services to contract by 11.9 per cent in 2009, split between a contraction of 14 per cent in developed economies and 7 per cent in developing economies. This is concentrated in trade in merchandise goods, linked tightly to the collapse of global industrial output in the last quarter of 2008 and the first quarter of 2009. Parts of trade in services suffered equivalently, especially transport (related to goods trade), financial services and tourism. But other services, mainly business and professional services, were much more resilient, even registering modest growth. According to UNCTAD, global FDI decreased by 15 per cent in 2008 and is forecasted to decrease by an extra one-third (to USD 1.2 trillion) in 2009. UNCTAD expects migrants’ remittances to fall by 5-8 per cent in 2009. The World Tourism Organisation projects international tourist arrivals to fall by 2-3 per cent in 2009.

The economic and trade-policy outlook

The global economic crisis has triggered a big shift in ideas and policies against free markets and in favour of government interventionism. ‘Crisis interventions’ are bunched in two key areas: huge bailouts, especially but not confined to financial services; and fiscal stimulus packages, usually combined with loose and unorthodox monetary policies.

Bank bailouts were probably unavoidable in the extreme conditions of late 2008. So were extra loose monetary policies to inject a superdose of liquidity. But it is highly debatable whether massive fiscal pump-priming – Keynesianism on steroids – was necessary. Sceptics doubt the effectiveness of the Keynesian fiscal multiplier, especially in complex open economies (in which some of the extra demand leaks abroad through imports). Oceans of public debt will mean higher taxes and real interest rates, in addition to inflationary threats. Collateral damage will include crowding out of capital for emerging markets, as well as making it more expensive.

The microeconomics and politics of financial bailouts and profligate macroeconomic policies are at least as vexing. It is stupefyingly naïve to expect these measures to be well-targeted and effective, while avoiding arbitrary interventions, wasteful pork-barrel spending and long-term entitlements. This will stifle private-sector incentives to save, invest and innovate. It will restrict competition and raise costs for businesses and consumers.

One aspect of the new conventional wisdom is the belief in ‘Keynes at home and Smith abroad’. Greater government macro and microeconomic interventions at home are needed to stimulate recovery and preserve social stability – and thereby prevent a slide into protectionism. But this should proceed in tandem with open markets abroad, which require robust international policy coordination (sometimes labelled ‘global governance’). This idea is based on a contradiction. Big Government at home, with its discretionary power and panoply of competition-restricting regulations, will inevitably spill over into protectionism. Keynes at home is Keynes abroad. After all, Keynes turned to protectionism in the 1930s, not least to make activist fiscal policy work in a ‘closed-economy’ setting.

Here historical parallels are in order. It is fashionable to make comparisons between the recent crisis and that of the 1930s. But in one important respect this is highly misleading. Then, tit-for-tat trade protection rapidly followed the Wall Street Crash, and the world splintered into warring trade blocs. This has not happened today, and it is unlikely to happen anytime soon.

Rather the appropriate comparison is with the 1970s. Then, a series of shocks triggered more government intervention. New labour-market and capital-market regulations, subsidies, fiscal-stimulus packages and price-and-wage controls were all rolled out. These measures exacerbated initial crises and prolonged stagnation. But they also spawned protectionism. Industry after industry, coddled by government support at home, demanded protection from foreign competition.

The result was the ‘new protectionism’ and ‘managed trade’ of the 1970s and 1980s.

Unlike 1930s-style protectionism, this was not an up-front declaration of a trade war with tariff hikes, blanket quotas and draconian foreign-exchange controls. Rather it was more subtle, deploying non-tariff barriers such as ‘voluntary export restraints’, ‘orderly market arrangements’, subsidies, public-procurement restrictions and onerous standards requirements. It did not spiral out of control; rather it unfolded slowly and insidiously, and lasted over a decade-and-a-half. It created overcapacity in several industrial sectors, and probably delayed global recovery and globalisation. That, not a melodramatic 1930s scenario, is the danger facing us today.

To read the rest of this article at the European Centre for International Political Economy blog ‘Trade Matters’ click here.

Razeen Sally is Director of the European Centre for International Political Economy (ECIPE).

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