Mark Field is MP for Cities of London and Westminster.
With the furore over the hostile takeover of Cadbury by American giant, Kraft, the attacks by the Obama administration on British Petroleum, and worry over the number of companies being sold to buyers from the Middle East, China, Russia and India, the ownership of business has become increasingly politicised. Against a backdrop of rising unemployment and deep seated economic unease at home, any perceived failure by a government to stand up for the ‘national interest’ against ruthless foreign invaders risks domestic uproar.
Unfortunately, however, I fear these awkward collisions between the worlds of business and politics are merely the outward manifestations of an underlying trend towards protectionism that is beginning to infect the global economy. But why the urge to batten down the hatches and what does it augur for the future?
I would contend that growing protectionism is in reality only a symptom of a far deeper, more fundamental anxiety – that of the colossal trade imbalances that the financial crisis has so painfully exposed (and which were in truth one of its main causes). How these might be overcome and what the world will look like once they have been unravelled may eventually tell the story of the global economy in this century.
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Since the rapid unfurling of the global financial system in 2008, politicians have been anxious to avoid the policy mistakes that followed the banking crisis of the 1930s. Uncomfortably aware of the speed at which the Wall Street Crash of 1929 led to the Great Depression, focus has rested primarily on public spending.
Of rather less interest, however, seem to be the equally important lessons that the 1929-1933 era taught us about protectionism. When the Smoot-Hawley Tariff Act of 1930 drastically raised tariffs in America, it sparked retaliatory measures amongst America’s trading partners which resulted in a slump in world trade that decimated economic growth and caused unemployment to soar. We need not be reminded of the political upheaval and military conflict that followed hot on the heels of those deep economic troubles.
It is with an eye to this dark historical period that world leaders have continued to reassert their commitment to free trade at each meeting of the G20 since 2008’s economic crisis. Yet the truth is that since the global economy hit the skids, ailing nations have failed to resist domestic pressure to shield their own companies and workers from the coldest recessionary winds. Independent monitor, Global Trade Alert, has estimated that discriminatory measures applied worldwide since the beginning of the financial crisis now cover $1.6 trillion - a staggering 10% - of global trade. Such measures (clauses in the banking bailouts that explicitly favour lending to domestic companies; ‘Buy American’ legislation; new rules in China that promote ‘indigenous innovation’; burdensome requirements on production processes in the EU’s Renewable Energy Directive) may not be the blatant protectionism of Smoot-Hawley, but they could still prove potent.
In the event that nations across the world become convinced that others are retreating from free trade, the rush towards protectionism could prove highly contagious. We need only remind ourselves of the 1930s to grasp the economic and political implications.
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I believe such a rush would only be the symptom of a much more fundamental problem - the overarching struggle between nations with trade surpluses, on the one hand, and nations with trade deficits on the other.
Countries such as China and Germany have enjoyed export-led growth that has allowed them to accrue vast reserves. This has, of course, been achieved in large part by the industry and enterprise of their people. Yet both have undeniably benefited from currency manipulation too. For some time the undervalued Chinese yuan has viciously undercut foreign competition. Meanwhile the adoption of fixed exchange rates within the Euro by Germany has kept that nation’s relative labour costs competitively low. Both countries have also relied upon the willingness of neighbouring countries to buy their goods, lending vast sums to its trading partners if necessary to fund their imports.
Over the past decade or so, deficit countries - the United States and Britain, above all – have undoubtedly enjoyed the cheap goods and easy money. But when the financial crisis hit, the resulting indebtedness was sharply exposed. They have therefore spent the past two years uncomfortably realigning expectations and slowly coming to terms with a new reality of constrained spending. But they are also gradually beginning to ask why they should continue to provide a dumping ground for cheap exports and burden future generations with vast debt simply to provide Chinese and German jobs.
Having convinced themselves of occupying the moral high ground, however, surplus nations are asking why they should relinquish economic power by unleashing some of their surplus and consider currency revaluation at the risk of undermining export-led employment.
In truth, however, both predicaments reveal the mutual symbiosis of today’s global trading relationships. By definition, not every country can have a trade surplus and those that do have now been made aware that any deep imbalance in their relationships with trading partners can leave the lender as vulnerable as the debtor.
The path ahead for the global economy therefore presents a choice – the massive trade imbalances can continue or somehow a healthier equilibrium has to be found. The first scenario is vulnerable to shocks, as we have seen. But the second inevitably entails the tense unravelling of trade imbalances.
In the face of such adjustment from both deficit and surplus nations, protectionism is deeply tempting. The combination of fear, anger, xenophobia, nationalism and anxiety over each country’s role in an ever competitive world, could suck the global economy into a dark spiral that, in the worst case scenario, could prove the precursor to more physical conflict.
It is for this reason that it becomes ever more vital that the World Trade Organisation and national, political and business leaders continue to make the case in the years ahead for the massive benefits of free trade. Efforts must be redoubled to roll back the protectionism of the past two years and break down the remaining barriers of all kinds to trade in goods and services. Only then will the path to prosperity become clearer for all.
I have placed a more detailed version of this article on my website, which you cab read here.
