Is Free Trade in the West in Danger?
DEVELOPMENTS
As the global community deals with a financial crisis of astronomic proportions, the casualties continue to mount. The latest endangered institution is
free trade. The level of protectionist rhetoric sounded by politicians, particularly in the U.S., has risen significantly, reflecting the current mood of the country. In this year's Pew 'Global Attitudes' survey, only 53% of Americans surveyed view trade as beneficial to the country. This number contrasts starkly with the European general attitude towards trade. Europeans questioned in the survey hold a far more favorable view of trade. While these figures may appear surprising on the face of things – both sides of the Atlantic are feeling the pains of the economic downturn, and in some cases are firmly entrenched in recessions – Europe stands to lose a lot more than the U.S. if free trade is scaled back.
This has given European heads of state cause for concern, with British Prime Minister Gordon Brown strongly urging other members of the G20 to resist the urge to embrace protectionism and Peter Mandelson, Britain’s Secretary of State for Business and Enterprise, asking President-elect Obama to reject what are perceived to be protectionist instincts within the U.S. Democratic Party. German premier Angela Merkel, whose country relies on exports for over a third of its economy, has also expressed concern that the global community may be tempted to employ protectionist measures as a means of shoring up the economy, stating that this will ultimately do more harm than good.
BACKGROUND
Protectionism, a government policy usually undertaken to restrict trade between nations, has long been applied by developed nations as a means of quelling domestic panic in times of financial turbulence. These policies can take a variety of forms, including tariffs on imports, government subsidy of sensitive industries, and even overtly rigid regulations preventing foreign investment. In the 1970's, both the U.S. and Europe increasingly applied protectionist measures in response to the contracting global economy. This resulted in government subsidization of multiple industries and discouragement of foreign competition.
The unpredictable nature of the current global financial crisis, coupled with a particularly volatile U.S. election that imparted, at best, mixed messages about trade, has given proponents of protectionism an unusual amount of political muscle. Yet the assumption that a clamp down on trade will directly improve measures of economic prosperity, such as unemployment numbers, is in direct contrast to previous experience. Examples from past recessions, such as the early 1980s, suggest that protectionist measures such as the quotas placed on the import of Japanese automobiles into the U.S. in 1981 only served to strengthen the Japanese auto industry. The prices of those vehicles were artificially inflated, significantly increasing the profit margin enjoyed by their manufacturers. The tariffs did not have the desired effect on the U.S. auto industry, and now, as was the case then, Detroit is in dire straits.
Both the U.S. 2008 Democratic primaries and the Presidential campaign were focused on returning the U.S. to the forefront of economic prosperity. The labeling of free trade as the culprit for job losses has exacerbated Europe’s distrust of the current U.S. political climate. While in Europe there are fewer calls directly discouraging foreign investment, appeals like those made by French President Nicolas Sarkozy to take ownership of multiple industries represent the most blatant support for protectionist measures yet.
ANALYSIS
Recent developments have only served to add fuel to a fire that has been slowly burning over the last few years. Both Europe and the U.S. have slowly upped the ante by making protectionist moves while continuing to espouse the importance of free trade. The last few years have seen an insidious rise of protectionist measures, increasingly applied under the guise of improving national security. This is evidenced by the uproar caused when Dubai Ports World–a subsidiary of a holding company of the government of Dubai–completed a take-over that would have given the company control of several U.S.
ports. The take-over became heavily politicised, with members of Congress citing national security concerns as a reason to block the deal (despite the fact that the UAE is an ally of the U.S.). Likewise, despite a very close relationship between Europe and the U.S., the EU has been guilty of giving Airbus significant subsidies to ensure that the company wouldn’t lose its dominance to U.S.-based Boeing. It has become par for the course to pay lip service to globalization while continuing to take actions that undermine its importance in a 21st century global economy.
The global financial crisis has illustrated not only the interconnectedness of the economy, but also the need for a coordinated response between Europe and the U.S. In order for global markets to undergo a much needed correction, it is essential that both avoid overtly politicizing the rescue of specific sectors or putting nationalism above economic health and prosperity. This connection of world economies through trade will inevitably cause some sectors to suffer more heavily than others. Conversely, some sectors will flourish and new strengths will be realized. Competition will likely increase, to the benefit of consumers.
It would be a recipe for disaster to repeat the mistakes of America’s 1970s stagflation crisis, which compounded a poor economy and high inflation with wage and price controls that caused the recession to last longer. Time will tell whether President-elect Obama's hard-line stance on the need to re-evaluate current trade agreements, a staple of the campaign trail, will play a prominent role in the shape of his administration. Either way, the importance of steps taken in the coming months by governments in both the U.S. and Europe is currently more symbolic than tangible. Ultimately, however, the question to be answered remains: will the U.S. stay open for business with Europe, or are we closing the ranks?
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Efe Izilein is a Business Development Associate for UK Trade & Investment in New York. The views expressed are her own.