The Financial Express

Trade in the time of rising protectionist sentiment

| Updated: October 23, 2017 18:06:24

Trade in the time of rising protectionist sentiment

The growing sentiment against the free flow of  goods and services, which is often dubbed as anti-globalisation stance, has been increasingly gaining ground in Europe and North America. This is likely to result in adopting wrong-footed policies. If that happens it could turn the economic situation worse than what it is now. It appears that all the economic woes of these countries are blamed on free trade when the issue is far more complex. In fact trade played a very insignificant role, if it has played any, to the current global economic and financial crises.  Even under a free trade regime, all sectors or industries in a country are not directly affected by trade; indeed, a very large part of the economy is only involved in non-tradables. To blame their woes on trade is rather fictitious.
However, that does not mean that the there are no problems associated with the current global trading system. There have been criticisms that MNCs (multinational corporations) played a significant role in framing WTO rules where primacy was given to their business interests rather than national interests.  The WTO (World Trade Organisation) decision making process, i.e., the Green Room decision making process has been criticised as undemocratic as it involves about 25 member countries. The process is fundamentally flawed as the criteria used to select these countries are unknown and no record is kept of the proceedings. Once decision is made by this group, it becomes a '' "take it or leave package" for the remaining member countries.  There are also concerns about the role WTO secretarial staff play in advocating the positions of the powerful member countries when they are supposed to be neutral. To address these issues the WTO must create inclusive and transparent mechanisms to build consensus rather than relying   on the "exclusive club". 
The poor economic performance in the Organisation for Economic Co-operation and Development (OECD) countries in the wake of the GFC (global financial crisis) and very subdued economic growth prospects for developing countries are creating a fortress mentality in these countries. There is now a growing fear among OECD countries that economic stagnation will continue which will lead to increasing political and social opposition to free trade. The protectionist signal coming from these countries is so strong that the Director-General of the WTO is now canvassing reforming the global trading system to benefit everyone implicitly acknowledging that the current system has flaws. The US Trade Representative during the Obama Administration was also calling for "pragmatic multilateralism'' when his own country had been  increasingly resorting  to unilateral action and  bilateral confrontation on trade issues instead of trying to build consensus in the multilateral forum i.e. the WTO.  What the word "pragmatic'' means ought be clearly defined because multilateralism is multilateralism, there are no prefixes and suffixes in it.
All these pronouncements from the WTO  Secretary General and the US Trade Representative  clearly  reinforce the view that the global trading system is in deep trouble. The system has become incapable of fostering trade growth which remains the key to foster global economic growth. This is reflected in the WTO forecast that  growth in trade in 2016 reached the  lowest level at 1.7 per cent since the GFC. The outlook for growth in trade for 2017 is also very pessimistic to uncertain - ranging from 1.7 per cent to 3.1 per cent. The upshot is trade has become the punching bag.
The trade protectionist sentiment is not a new phenomenon, it has always been there as reflected in the eagerness of most countries to export is not usually matched by their eagerness to import. These countries miss the fundamental point that one country's exports are another country's imports. And to pay for these imports these countries must export otherwise trade flows will cease. Exports are the means for imports which are needed but the country can not produce them or can be produced at a much higher costs than imports.  The message is very clear: it is in every country's interest to strive for an open global trading system which contributes to higher levels of income and employment for all countries. 
Labour movements have historically been always opposed to open trade. Despite the commitment of G-20 countries to an open trading system, according to the WTO, they have erected 1583 new trade restrictions. But now it appears that protectionism is having a political moment as never seen before. This is because things have not gone well for a long time for a very large proportion of the population in developed countries, in particular North America and Europe and these people feel economically insecure. Their finger point to the tide of imports coming in and local firms offshoring their production and service provision.   They have figured out that the open  economic system in general and trade in particular is the cause of their economic woes while the causes of their plight are  far more  varied and very deep-rooted structural problems. No wonder this anti-trade sentiment is now fuelling the growing protectionism. The rhetoric of various politicians from the left to the far right and all others in between and their constituents in the USA and Europe are giving vent to it instead of informing the people with objective prognosis. That is how populists capture the public sympathy just inflaming the situation and truth becomes the principal victim of that process.
 But what distinguishes the current trend of protectionism from anything seen before is the growing hostility to international trade of any kind. It goes beyond protectionism - to create an autarkic economy if possible. Dirigisme will rule supreme as the economic policy. Mainstream economists are obviously deeply worried about the consequences of implementing protectionist policies as advocated by populist leaders and they cite historical precedence of such a policy and its consequences. By that they refer, in particular, to the Smoot-Hawley Tariff Act of 1930 which led to the Great Depression  of 1929-33. During this period (1929-33), US national income fell by 36 per cent; unemployment rose to over 25 per cent; 40 per cent of banks closed their doors and farm income fell by 50 per cent. 
As now, economists in the USA then also opposed protectionism embodied in the 1930 Act. 1028 members of the American Economic Association issued a signed petition on May 05, 1930 opposing the Act. Therefore, an already bad situation will only become worse in all likelihood if the stipulated all-embracing protectionist measures are implemented. True, domestic capital is moving out of the USA but foreign capital is not also flowing in either. Why? Because the current environment for investment is not favourable. The issues that are causing the current economic distress are fundamentally related to something macroeconomic in nature, definitely not low wages or even unfair practices in other countries. The USA has a very long-standing problem with savings as reflected in its current account deficits. In fact, net private savings and investment have been declining.
Instead of addressing the problems associated with macroeconomic fundamentals, if the US President goes to impose penalty tariffs on imports from Mexico and China, that will only hurt the very people he intends to help.  More ominous for the USA and European countries is that if anti-trade rhetoric persists, an already very troubled global economy will further slide into much deeper trouble and that will seriously compromise the prosperity of future generations. In such a situation an environment will be created for crony capitalism to flourish as crony capitalists always seek protection from competition and use governments to achieve their business objectives. 
However, a more fundamental issue is that while the benefits of trade are very clear, those benefits must be shared more equitably. This calls for a trading system  which is inclusive and goes further to accommodate poorer countries and take into account their non-trade concerns such as food security.  Furthermore, in the context of developed countries, it is important that while communicating the benefits of trade as well as costs, it is imperative that how this conflict will be resolved ought to be clearly stated.  This will significantly mitigate opposition to free trade.  
The writer is an independent economic and political analyst.
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