Free trade is under attack all over the world because of slowing growth, unemployment worries, accelerating inflation, misaligned currencies, paranoia about China’s economic juggernaut and anxiety about sovereign funds.
That’s too bad because protectionism is a strategy for losers. It appeals to countries which, unwilling or unable to compete in global markets, erect barriers to the free movement of goods and capital in the mistaken belief that it will work. When asked if protectionist sentiment was increasing in the European Union, European Commission president Jose Manuel Barroso told the Financial Times last week, “Yes, and I fear this rise not only in Europe but all over.”
French Prime Minister Francois Fillon has warned international banks against trying to acquire Societe Generale SA. And European companies are very concerned about China’s failure to protect intellectual property rights.
“It might be hard to resist the protectionist calls,” Barroso said.
Democratic presidential candidates Hillary Clinton and Barack Obama, pandering to voters who blame the North American Free Trade Agreement (Nafta) for lost jobs, said the US should consider ditching the accord with Canada and Mexico, if it can’t be renegotiated on more favourable terms. Now, US lawmakers are angry over the air force’s decision to award a contract worth as much as $35 billion (Rs1.41 trillion) to European Aeronautic Defence and Space Co. and its partner Northrop Grumman Corp., instead of giving it to Boeing Co.
Protectionism risks retaliation. Canada, the largest foreign petroleum supplier to the US, may end the privileged access to Canadian oil that the Nafta treaty bestows on the US, if a Democratic president seeks to renegotiate the agreement. Other countries might respond by refusing to fund the large US trade deficit or by raising tariffs on US exports.
Free trade’s demise might unleash a cocktail of stagflation, rising interest rates, a plunging dollar, squeezed corporate profit margins and tumbling stock markets.
World trade fell 70% two years after the enactment of the US Smoot-Hawley Tariff Act of 1930.
Nafta, which took effect in 1994, has become a scapegoat for an exodus of US jobs. Technological change is the real culprit. Answering machines did away with many secretaries and switchboard operators; bank tellers fell victim to automated teller machines; laptops put typewriter manufacturing out of business. “Enormous gains in technology have raised the bar on global competitiveness, punishing firms with outmoded facilities, regardless of their location,” Joseph Carson, New York-based chief economist at AllianceBernstein Lp., wrote in a 2003 study.
From 1995 to 2002, about 22 million manufacturing jobs disappeared globally, an 11% decline, he said. The US lost two million of those jobs, while Chinese manufacturing employment “fell a whopping 15% from 98 million in 1995 to 83 million in 2002,” Carson said. Yet during the same period, global industrial production rose more than 30%.
You can’t today have an insular economy that is self-sustaining, unless you consider North Korea a going concern. Nor did it make sense two centuries ago, when British stockbroker, parliamentarian and self-made millionaire David Ricardo developed the theory of comparative advantage. It holds that countries boost economic prosperity by exporting the goods they are relatively more efficient at producing, and by importing those that other nations are relatively more efficient at making.
“Political economy has found few more pregnant principles,” Paul Samuelson, Nobel laureate and professor emeritus at the Massachusetts Institute of Technology, wrote in his “Economics” textbook. “A nation that neglects comparative advantage may pay a heavy price in terms of living standards and potential growth.”
The Obama-Clinton trade debate may just be political theatre, destined to fade after the Democrats choose a candidate. Still, there’s a risk that it won’t die down.
It is also one that clearly separates both Clinton and Obama from the presumptive Republican candidate, Senator John McCain, who is a free-trader. Moreover, the Democratic candidate may be pushed into pursuing an anti-trade stance from the political left by independent candidate Ralph Nader. That would be a shame because leaders shouldn’t appeal to the lowest common denominator, nor make policy based on focus groups or special interests.
“Most arguments for tariff protection are simply rationalizations for special benefits to particular pressure groups and do not stand up under analysis,” Samuelson says.
The next US executive needs to rebuild alliances and ameliorate the antagonism with other countries built up during George W. Bush’s administration. It shouldn’t begin by repudiating trade accords.
What’s more, rich countries such as the US, Japan and those in western Europe are morally obliged to redistribute some wealth to poorer nations by giving them access to markets. Prosperity breeds a safer, more peaceful world in general. The West spent trillions to defeat communism and persuade the Asian subcontinent to embrace capitalism—victories that allowed 3.3 billion people to enter the global market economy. The US and Europe can’t now wish that those emerging nations would just go away. Bloomberg
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