The following article is by Peter G. Hall, Vice-President and Chief Economist, Export Development Canada.
“Never waste a good crisis”. This has recently become the mantra of key policymakers, who are seizing the moment to enact good legislation. Sadly, the crisis has also dredged up discussion of policies that, if applied, would cause great harm. Protectionism is close to the top of that list.
The world has spent the last 30 years – arguably more – freeing up trade. The evidence is manifold. From the GATT round of discussions to the WTO rounds, the Canada-US FTA, NAFTA, EU integration and ongoing accession, implementation and negotiation of other regional trade agreements, to the host of bilateral agreements in place or on the table, the world has bought into freer trade as a means to greater global prosperity – a prosperity that each adherent participates in. To top it off, considerable effort has been devoted to freeing up international investment flows, a critical element of global trade, through a profusion of bilateral double-taxation agreements and investment protection agreements. It doesn’t stop there – many more deals are in the works.
Current economic conditions will likely spur much debate about the ultimate effectiveness of this protracted mega-shift in world commerce. Without a doubt, trade policies put in place, together with the unprecedented explosion of computing power and communication technology, have brought an historical shift in global trade linkages. Trade now accounts for 65% of global GDP, up from 40% just 25 years ago. Moreover, global productivity growth has shifted upward over the same timeframe, a testament to today’s more efficient global distribution of production. Many countries, both industrialized and emerging, have experienced these productivity gains.
Given this backdrop, the words ‘Buy American’ in US fiscal stimulus legislation sent shockwaves around the world, kindling fears of a global relapse into protectionism. France joined the fray, advocating a ‘France-first’ industrial policy that would require multinationals to begin their layoffs offshore. More recently, Mexico announced retaliatory trade measures against certain US goods.
In addition, the nationalisation or near-nationalisation of Western banks has led to allegations of covert protectionism, in which domestic deals would receive favourable treatment.
The rhetoric alone is troubling. Protectionism is an instinctive defence mechanism that sells well. It might even yield temporary benefits, but in the end, hurts its perpetrators and everyone else, too. Even more discouraging, one action leads to a sequence of retaliatory actions that snowball, magnifying the damage and, especially in today’s integrated economy, ensures that the effects
are felt almost universally.
Will the wish for a quick win carry the day? We can all hope that reason will prevail, and that rhetoric will remain just that. Multinational corporations understand that their competitive position depends critically on maintenance and enhancement of the current system. And it’s quite likely that the average worker gets it too, perhaps more than ever before.
The bottom line? The case for continued globalisation remains strong. Reverting to protectionism would increase costs worldwide, lower overall welfare, and prolong the recovery. No one wants that. With economic conditions as bad as they are, the last thing needed is additional bad news.
