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David Jane: How real is the threat of protectionism?

David Jane 200

Over recent decades there has been a preference for the view that unregulated foreign trade benefits all parties, at least among mainstream economists. Many reference 18th century Scottish economist Adam Smith and his seminal work ‘The Wealth of Nations’ as justification for their stance.

We have seen a determined push by countries and their policy makers to endorse this economic philosophy. Globalisation has played a key part, including shifts in the structure of organisations and the location of production. Not to be ignored is the moment China joined the World Trade Organisation in 2001.

The volume of traded goods quadrupled between 1980 and 2008 and increasing levels of trade have played a key role in global GDP growth and helped bring huge numbers of the world’s poor out of poverty, but will it continue?

The environment has changed fundamentally and, with economic growth remaining weak, the contribution of globalisation to inequality has become an increasing focus. Governments surely will be tempted, or at least expected, to protect some of this scarcer growth to benefit their electorate.

In the Great Depression of the 1930s, the trend was to increase import tariffs to protect failing industries from falling demand, but this led to retaliatory measures which hurt global trade and the global recovery in aggregate.

At the start of the Great Recession in 2007, the G20 promised not to protect economies against foreign competition or favour domestic businesses. Despite these promises, WTO disputes, which were on a downward trend, have increased sharply.

This increased number of disputes is not dominated by new tariffs and quotas, rather it has been selective subsidisation, as companies need cashflow support rather than protection from competitors. There was a drop last year, maybe as so many governments introduced subsidies they felt hypocritical registering disputes with the WTO.

These subsidies were also aimed at restoring economic growth, with fiscal policy often targeted at specific sectors, or even specific firms via bailouts. In addition, many disputes have started in the auto, wind-power and solar sectors as many governments have focused their efforts on areas where WTO rules are weakest.

There are other ways of protecting a country’s slug of growth. The quantitative easing of recent years springs to mind, with looser monetary policy also being expressed through weaker currencies. This provides a short-term benefit, but with retaliatory action likely and a questionable longer term impact.

It might not be obvious but protectionism by stealth is on the increase. This is consistent with a political mood which seems to be moving away from an era of unfettered global free trade. This could have negative consequences for global growth but also give rise to a new set of winners and losers.

The past two decades have seen resources, patent-owners and cheap labour markets benefit. Going forward, we should consider locally favoured industries. Also, economies with self-sustaining internal markets, such as the US, may do better at the expense of trade-driven economies like those in South East Asia.

David Jane is the founder of Darwin Investment


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