Business

Saturday October 31, 2009

At risk ... beggar-thy-neighbour

WHAT ARE WE TO DO By TAN SRI LIN SEE-YAN


ALMOST everyone is for free trade. Protectionism is a no-no. And, gains made so far need to be consolidated especially at this time of Great Recession. Surely, no one wants to fuel a new era of protectionism a la the 1930s, put into place by the infamous US Smoot-Hawley tariffs.

At the November 2008 and April 2009 G20 Summits, both rich and emerging economies promised to eschew new trade barriers and work hard to complete the Doha round by year-end.

Yet within days of the November 2008 summit, Russia and India raised tariffs on cars and steel respectively. No progress has since been made on Doha.

This year, more protective tariffs were invoked-from EU’s pre-emptive penalties on imports of Chinese steel pipes and US ban on imports of Chinese poultry, to Italy’s anti-dumping duties on Chinese and Vietnamese shoes.

China has since retaliated with vigorous complaints to the World Trade Organisation (WTO). They also initiated anti-dumping and anti-subsidy investigations into chicken parts and car components imports from the United States.

The most recent irritant is the US’ imposition of high tariffs on tyre imports from China. This needs to be viewed in the context of a string of ominously protectionist measures, starting with the set of “Buy America” provisions for public works in the Obama stimulative package.

Playing with fire

The lessons of history are clear. Economic isolationism of the 1930s, epitomised by the US Smoot-Hawley tariffs, cruelly intensified the Depression.

To be sure, the WTO and its multilateral trading rules are a bulwark against protection on that scale.

With just-in-time delivery and far-reaching efficiently organised international supply chains, today’s globalised world could be seriously disrupted by policies far less onerous than Smoot-Hawley. Even modest shifts from “openness” within the WTO rules can spark off enough to turn the current recession much nastier.

With their exports faltering, the WTO rules do allow nations plenty of scope to be less keen on free and fair trade. After decades of tariff cuts, for example, many nations’ tariffs have dropped below “bound” rate ceilings. On average, they could readily triple their import levies without breaking WTO rules.

I am almost certain President Obama does not intend to start a trade war. Neither did President Hoover intend to pick one either; his political abdication made it possible.

We all know once anti-trade passions are unleashed, they can readily spread out of control. Obama should not give any nation reason to conclude he is protectionist.

The battle of Smoot-Hawley

Modern free trade began during the Great Depression, after the catastrophic Smoot-Hawley tariffs of June 1930. The Tariff Act of 1930 increased nearly 900 US import duties. It was debated, passed and signed as the world tumbled into Depression. Its sponsors, Congressman W. Hawley and Senator R. Smoot, have now come to personify economic isolationism of the era.

Despite strong near unanimity among economists (including big-names like Taussiq, Douglas and Fisher) against the Act (unusual at a time when the profession was ideologically split on how best to deal with the macroeconomics of the ongoing Great Depression), President Hoover signed it as a “shrewd play of tactical politics” by sharply raising the cost of imports.

In so doing, he had hoped to increase the trade surplus. This in turn would force the rest of the world to adjust their overcapacity (instead of the US), thereby minimising US pain. Of course, it later fell flat on its face. The tariffs ignited widespread beggar-thy-neighbour reaction around the world.

The flow of global capital and goods and services collapsed.

President Roosevelt rebuilt pro-trade consensus with a series of successes in the 1930s. It was not until after the aftermath of WWII that J.M. Keynes and J. White and others who negotiated the Bretton Woods accords, also created the Global Agreement on Trade and Tariffs, the predecessor of the WTO.

As I see it, what has evolved finds its parallel more with the 1970s. That’s when nations responded to the first oil shock and other exogenous developments.

Governments then, like now, increased domestic interventions ranging from fiscal stimuli, subsidies to the most affected and monetary easing, to labour and capital market restrictions. These spilled over into increasingly protective practices, including tariff barriers, buy-local initiatives “voluntary” export restraints and “orderly” market arrangements.

These managed trade measures (dubbed the new protectionism) lasted well into the 1980s. They affected about one-half of global trade.

The value of world trade shrank in 1976 and 1983, with anaemic annual growth rates well below 5% between 1981 and 1987.

There was deep and prolonged economic stagnation (global GDP was way under 3% during 1973-75 and 1980-83).

The many faces of protection

This creeping protectionism led to complex regulatory barriers that emerged (slowly and insidiously) from bigger and more arbitrary government at home – an experience that many in the US wish now to forget.

Realistically, this ‘30s or ‘70s type of protectionism can become the big danger today. Avoiding it will require limits to government intervention. Also needed are well-functioning open markets that provide credible price discovery to promote stable growth.

With weakened economies, growing popular scepticism of open markets will surely grow. Bear in mind US Presidents have not hesitated to use protectionist measures to suit their political ends.

In 1983, President Reagan imposed a 49% tariff on Japanese motorcycles. In 1989, President Bush extended Reagan-era steel import quotas. In 1995, President Clinton threatened Japan with tariffs on luxury cars – only an 11th hour deal scrapped the tariff. And in 2002, the younger President Bush imposed up to 30% tariff on imported steel. In the face of European retaliation, he repealed them in 2003. All this, of course, is history.

For years, US Presidents have faced a China conundrum, confronting great difficulties in finding the right balance in getting China to practice “fair trade” without unleashing global protectionism.

Realistically, for the US, the US$16bil wholesale tyre market is no big deal. But flirting with protectionism can be dangerous, especially before the September G20 Summit. China must fear the worst. If US and China can do it, why not others? Tit-for-tat retaliation can only ignite a global trade war.

Fair enough, the US did engineer G20 to come out strongly for free trade at the September Summit: “We will fight protectionism. We are committed to bringing the Doha Round to a successful conclusion in 2010,” and charged Ministers to review and remain engaged on the progress of negotiations for further action at its next meeting in 2010.

The October IMF/World Bank Meetings that just ended in Istanbul did, however, re-emphasise these commitments: “We affirm our collective responsibility to avoid protectionism in all its forms.” (Financial Committee, IMF); and, “We urge members to avoid protectionist measures”. (Development Committee, World Bank).

Fair-weather free traders

The global trading system has many enemies. Like it or not, at this time, the man in the White House is counted as its main champion.

World trade will shrink by some 12% in 2009. A recent report from World Trade Alliance (Geneva) claimed that on average, a “G20 member has broken the no protectionism pledge once every three days since it was made”. Some of this, I am sure, is hyperbole.

As economies weaken, there will be growing scepticism towards open markets. We now see politicians from Washington DC to Beijing, Paris to Seoul, being pressed to help troubled industries, regardless of the consequences for trade.

The bailout of US car makers represented a discriminatory subsidy. Chinese industries from textiles to steel are given handouts and rebates in the name of economic stimuli.

Subsidies will beget more subsidies. The French President even talks of Europe becoming an “industrial wasteland” if it did not prop up its manufacturers. They will also invite retaliation.

All these came at a risky time. As I see it, protectionist actions, in particular against China, have been multiplying in recent months. Of late, global leaders as a group – sensing where such tit for tat can lead to – have stayed “cool”. Yet, new barriers have steadily been erected.

What is to be done?

Viewed in its totality, free-traders like myself cannot but worry.

What’s needed is

(i) credible political leadership, especially from the US and China – at least they should avoid beggar-thy-neighbour politics;

(ii) at some point in time, hopefully sooner than later, President Obama must act firmly to show his anti-protection credentials;

(iii) seriously conclude the Doha Round (as the G20 said they would by year-end);

(iv) increased transparency (via WTO) to publicise new barriers of any kind – whether or not they are allowed under WTO rules, to avoid backsliding in particular; and

(v) best of all, continue promoting vigorously economic stimulus until recovery is stabilised and secure.

There is nothing like boosting demand at home to reduce any temptation to hijack it from abroad.

Protectionism in the 1930s flourished on the back of serious macroeconomic failures. Surely, we can’t afford to have this happening again.

·Former banker Dr Lin is a Harvard-educated economist and a British Chartered Scientist who now spends time promoting the public interest. Feedback is most welcome at starbizweek@thestar.com.my.

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