Home / Opinion / The lure of protectionism will grow

One of the surprises of the 2008 global financial crisis is that the “great recession" that followed did not trigger much of a protectionist backlash. Developments this week suggest that, in the absence of more enlightened political leadership, this may be changing.

As output collapsed after the financial system’s “sudden stop" in the fall of 2008, and as a damaging global depression loomed, there were fears that countries would adopt protectionist trade measures as a way to promote their own growth at the expense of others.

This was avoided for two major reasons: the conviction that such beggar-thy-neighbour policies were likely to be ineffective, if not counter-productive, over the longer term, and the willingness of Group of 20 leaders to adopt a comprehensive pro-growth policy agenda at their April 2009 summit meeting.

But what worked well then was not sustained. Rather than use the London gathering as a foundation to maintain a comprehensive pro-growth policy, advanced economies one after the other slipped into excessive and prolonged reliance on just their central banks. And because monetary policy tools, including innovative unconventional ones, are ill-suited to sustainable fixes for the ailments of advanced countries, macroeconomic outcomes repeatedly failed to promote inclusive prosperity.

This protracted period of low growth and rising inequality is now threatening the consensus in favour of globalization and regional integration. As a result, progress on liberalization and cross-border integration is hitting a wall.

This week, both France and Germany publicly raised questions about the Transatlantic Trade and Investment Partnership being negotiated by the European Union and the US. French officials went as far as to urge EU officials in Brussels to halt the discussions.

In addition, the Trans-Pacific Partnership seems increasingly unlikely to be ratified, given the limited appetite for any such deals in the US Congress.

It is not just negotiations on new free trade arrangements that are stalling. The UK’s vote in June in favour of Brexit showed that even long-standing existing agreements can no longer be taken for granted.

All of these events are heavily influenced by a broader common force: popular dissatisfaction with enduring low growth and rising inequality, both of which have fuelled the popularity of anti-establishment movements that advocate nationalistic policies. Indeed, the next step could involve a more forceful push to go beyond simply countering future regionalization and globalization initiatives to weakening existing ones. The North American Free Trade Agreement and the EU are already in the crosshairs of anti-establishment politicians.

An increasing number of governments have been tilting away from their traditional free trade orientation and towards a more insular stance. The weak version of this trend is to stress that trade needs to be fair and not just free. The stronger version is to promote import-substitution, as well as discourage inflows of foreign goods and money.

Conventional politicians justify their use of a tone that recognizes and accommodates these strengthening protectionist forces by arguing that the hit to global trade and cross-border investment would be much more durable and damaging if anti-establishment movements came to power.

In the shorter term, these developments represent yet another headwind to global trade and growth. To minimize the adverse consequences, one possibility would be for countries to come together —starting with the G-20 summit next week—and should make credible commitments to enacting more detailed measures consistent with the rhetoric and commitments made at previous gatherings.

That, however, is unlikely, given that many advanced countries’ leaders find themselves constrained by a fraught political atmosphere at home. Instead, the election calendar in Europe and the US mean we should expect a further shift, especially in the short term, away from cross-border integration across regions or within them. BLOOMBERG

Mohamed A. El-Erian is a Bloomberg View columnist and chief economic adviser at Allianz SE.

Comments are welcome at otherviews@livemint.com

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