Monday, March 30, 2009

Missing in action on the trade front

Business Times - 31 Mar 2009

Suffering 'hegemonic fatigue', Washington seems unwilling to pay the economic and political costs of promoting free trade


THE leaders of the 20 economies who met in Washington last November made a commitment to resist taking protectionist measures that could end up devastating an already ailing global economy.

But according to the recent World Bank report, most of these governments, including the US and China, have violated that promise by imposing direct and indirect restrictions on imports, raising the spectre of a costly trade war.

As it is, global trade has suffered the sharpest decline in 80 years. Indeed, not a day goes by without new reports about governments around the world making subtle moves (subsidies and bailouts for failing industries) and taking not-so-subtle steps (direct tariffs and taxes on imports) to 'protect' their frail domestic industries from foreign competition.

Hence, the US and Mexico that together with Canada signed the historic North America Free Trade Agreement (Nafta) in 1992 - which was seen then as one of the greatest success stories in the effort to promote global free trade - are now in the process of sliding into a mini trade war.

Mexico has announced that it was planning to impose new restrictions on the importation of 90 American products in retaliation against the US decision to cancel a programme that permitted Mexican truck drivers the right to transport goods across the United States. It is all taking place during a time of rising tension between these two neighbours over Mexico's drug wars, that are said to threaten US security.

And, as history tells us, when economic nationalism intertwines with conflicting national security interests, the mix could prove to be quite explosive.

Indeed, officials and pundits who have warned of the threat that this protectionist resurgence is posing to the global economic and security system are not engaging in fear mongering. The so-called beggar-thy-neighbour policies that were adopted by the major economic powers during the Great Depression of the 1930s helped worsen and prolong the economic crisis of that time.

Hence, the value of global trade plummeted by 66 per cent between 1929 and 1934, in the wake of the protectionist wave that followed the US Smoot-Hawley Tariff Act in 1930.

Tit-for-tat government strategies created a vicious circle of trade restrictions and competitive devaluations that bankrupted economies and toppled governments around the world and brought into power militaristic dictators - ending eventually in the collapse of the then international liberal economic order which led to World War II.

The good news is, unlike in the 1930s, we do have today a set of global trade rules that have been utilised quite effectively during most of the post-World War II era - and particularly following the creation of the World Trade Organization (WTO) in 1995 - and that makes it more difficult for governments to impose direct restrictions on foreign imports.

There are also powerful domestic interest groups that recognise that protectionism could retard the growth of important industrial sectors that depend on foreign imports, including raw material and industrial parts for manufacturing their products.

Moreover, most governments and political and business elites recognise the benefits of free trade and - as demonstrated by the statement denouncing protectionism that the Group of 20 (G-20) leaders made last November - they all remain committed to the principle of liberalising global trade.

In fact, governments in emerging markets like China and India that have benefited from the free flow of trade and investment have the most to lose from a new protectionist surge and have been very vocal in their denunciations of protectionism.

The bad news is that in the US and in many of the industrialised nations, there has been a rise in anti-globalisation sentiment, especially since the start of the current economic crisis which has hurt many professionals and businesses that seemed to be prospering during most of the 1990s - not to mention blue-collar workers in the decaying manufacturing industries.

That anti-free trade backlash combined with the kind of resurgent populism we have witnessed in recent weeks in the US is putting a lot of political pressure on Western governments, including the Obama administration, to adopt protectionist steps - for example, the Buy American clause in the US economic stimulus package that may technically not violate global trade rules but that do create a dangerous political momentum towards protectionism and global economic warfare.

Hence the growing tension between the US and the Europeans over the response to the global economic crisis could intensify if Europe resists the Obama administration's call for large fiscal stimulus. That kind of European response in turn could lead US lawmakers to make certain that the economic stimulus package creates jobs at home and is not spent on purchasing European products and services.

'Why should the money we spend on our stimulus package help stimulate the European economies whose governments refuse to use their taxpayer money to revive their own economies?' members of Congress will argue.

Poor nations are bound to be the major losers in a fragile global economy beset by trade tensions, as wealthy nations spend more money on domestic needs and set barriers to imports from poor developing countries. And there is general agreement that emerging markets such as China, India, South Korea and Brazil - who greatly benefit from exports to the West to fund their economic development - will also suffer if the protectionists get the upper hand in Washington and Brussels.

So here is an interesting paradox. The majority of the G-20 benefit in one form or another from the expansion of global trade and have very little to gain economically by resorting to trade restrictions, which is the reason why they expressed strong opposition to protectionism during their November summit and are expected to do that again at the conclusion of their meeting this week in London.

So why have these same G-20 governments been engaged in one form or another of protectionist skirmishes since last November and sacrificing their long-term economic well-being?

The short answer is that these governments conclude that unless they take steps to placate angry voters and powerful protectionist groups like trade unions and struggling businesses, they will be voted out of office.

What could, and should, counter these protectionist pressures at home are countervailing pressures from a global hegemon that has a vested interest in maintaining such a liberal economic order.

Such a hegemon serves as a powerful force that propels the ideological drive towards expanding the free flow of products, investments and ideas, protects international norms and multilateral institutions that guide the process of globalisation, and creates incentives for other governments and economies to join the system.

That has been the role that the US has been playing since 1945, and even more energetically after the end of the Cold War when it emerged as the borrower of last resort that was willing to absorb the costs of preserving and strengthening an open global economic system, including by heading the effort to liberalise global trade through bilateral and international agreements, even if that meant subsidising the occasional 'free rider'.

To put it in historical perspective, the US as the largest and most powerful economy helped to weaken and eventually destroy the liberal international economic system in the 1930s when its political elites and public decided that taking the protectionist path was in the American interest.

Things turned upside down and for the better after World War II when promoting a liberal economic order was seen to be in the interest of the US, which ended up becoming the hegemon in the new system.

The danger that this system is facing now is that against the backdrop of the global financial crisis and the ensuing populist mood in the US, America's elites and people are experiencing 'hegemonic fatigue'.

Their commitment to economic liberalism has been weakened and that makes it less likely that Washington would be willing to pay the economic and political costs of promoting free trade.

That fatigue has clearly been evident in the failure of President Barack Obama to put an emphasis on the need to battle protectionism and revive the trade liberalisation agenda as part of an effort to resolve the economic crisis.

If anything, the emphasis that Mr Obama and his aides are placing on promoting 'fair trade' and their lack of enthusiasm for negotiating new free trade deals is playing directly into the hands of protectionists in Washington and in the capitals of its trade partners.

What is certainly missing from Mr Obama's internationalist oratory is the cry for action - the Yes-We-Can and Yes-We-Should - as it applies to the need to liberalise global trade as a way of advancing economic prosperity and international peace. Indeed, it is not inconceivable that during the coming G-20 meeting, it will be the leaders of China, India and Brazil, among others - and not the US president - who will be decrying protectionism and celebrating the benefits of free trade.

It would be one more sign that the world as we knew it for such a long time is changing right before our eyes.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.

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