If the financial crisis that began last September wasn’t bad enough, a more dangerous threat may be on the horizon. Five months after Lehman Brothers Holdings Inc.’s demise, protectionism is rearing its ugly head.
Last week saw the World Economic Forum in Davos descend into acrimony. US-bashing took centre stage, with Russia and China blaming Washington’s past economic policies for the world’s woes. Officials also directed anger at the recently passed US stimulus package that contains various “Buy American” provisions meant to help local industries at the cost of global competitiveness.
Every year, Davos ends with a high note of optimism for the completion of the Doha Round. But, as the Financial Times reported this weekend, optimism is now missing. Commerce minister Kamal Nath, responsible for stalling Doha last year, threatened that India may respond similarly if the US raised tariffs at its end.
The threat of financial protectionism—global banks retreating to their home borders —is even more real. The Institute of International Finance estimates capital flows to emerging markets to slow by 82% in 2009, from their highs in 2007. UK Prime Minister Gordon Brown noted in a recent interview with The Wall Street Journal, “It’s the first stage of a financial protectionism that will lead eventually to the kind of trade protectionism we’ve seen in the past”.
With global trade expected to shrink by 2.8% in 2009—the first time since 1982—the free movement of trade and capital becomes more important than ever. More than just offering rhetoric, nations need to reassure each other that they won’t shut their borders. At this point, concerted international action is required to keep protectionism at bay. The World Trade Organization should closely monitor member nations’ trade practices. The Doha Round, moreover, should become every nation’s top priority. US President Barack Obama, who has been lacklustre on this front, can start by demonstrating some leadership.
The US, or any other country, must be careful or it will unleash a beggar-thy-neighbour domino effect, resembling that of the 1930s. If world leaders can’t learn from history, they’ll be condemned to repeat it.
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