A Looming Danger for the Global Economy
As the recession takes hold, the fed continues to cut interest rates, and countries around the world cut growth forecasts, the Economist warns of another looming danger for the global economy: protectionism.
For the first time in more than a generation, two of the engines of global integration—trade and capital flows—are simultaneously shifting into reverse. The World Bank says that net private capital flows to emerging economies in 2009 are likely to be only half the record $1 trillion of 2007, while global trade volumes will shrink for the first time since 1982.
This twin shift will force wrenching adjustments. Countries that have relied on exports to drive growth, from China to Germany, will slump unless they can boost domestic demand quickly. The flight of private capital means emerging economies with current-account deficits face a drought of financing as well as export earnings. There is a risk that in their discomfort governments turn to an old, but false, friend: protectionism. Integration has less appeal when pain rather than prosperity is ricocheting across borders. It will be tempting to prop up domestic jobs and incomes by diverting demand from abroad with export subsidies, tariffs and cheaper currencies.
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There are multiple schools of
There are multiple schools of thought about this, and typically the Economist tends only to invoke the historical rationale that considers protectionism to really be 'beggar-thy-neighbour' -ism which leads intractably to trade wars and conflict. But new-trade theorists like Jeffrey Sachs and Paul Krugman have for a long time called for a measure of infant industry protection in the poorest economies to allow domestic industries to compete from a more stable platform against the multinationals.
So while we collectively grit our teeth, it might be worth keeping in mind that the financial crisis might level the global playing field a little for developing economies by enabling them to avoid import surges in devalued goods. Arguably, current account deficits have been caused in many instances by this very issue. The theory goes that current net importers can develop domestic import substitutes which will turn into competitive industries in their own right once global trade volumes begin to increase again.
But at the same time, I suspect that trade in low-tech goods requiring less capital investment, like agricultural products and textiles (to name a few), are the ones that will be less affected by credit contraction and so much may remain the same. Nonetheless, it is possible to see a silver lining as the economic clouds gather and indeed to see opportunities arising for the informed and responsible investor.
The first rule of survival is "me first"
Evidently, even if it’s going to be to a modest rate, globalization and free trade would certainly suffer some real set back. A pointer to this reality is displayed by ever increasing grumblings against free trade especially among rich nations. Nationalization was just a panacea to the economic crisis while protectionism is an expected natural reaction to a system widely blamed by most victim nations as the remote cause of their economic woes. It is only expected that in times like this, people tend to seek to protect their own interests above that of others. Let’s not forget; the “first rule of survival is me first” which is a summation of the inherent human tendency and a display of his animal instinct.
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