First published in the Telegraph on 24 September 2009
When Barack Obama, Gordon Brown and their colleagues in the G20 conclude this week’s summit in Pittsburgh, at least one item in the final communiqué is a dead cert. As they did in London six months ago, and Washington six months before that – and, indeed, at every major summit in living memory – the leaders will state clearly and firmly that they deplore any attempts to lurch into protectionism, promising to do everything in their power to ensure countries do not erect economic barriers and imploring their trade negotiators to get the Doha Round of trade negotiations back on track.
It is ironic, then, that the one area in which governments have truly failed since the financial crisis began is in resisting the tendency towards economic nationalism. According to Global Trade Alert, an authoritative annual study from the Centre for Economic Policy Research in the US, governments around the world have – despite all their promises – implemented around 70 protectionist measures in each quarter of this year.
Some are “traditional” measures, familiar from the Depression and elsewhere – subsidies for domestic producers or tariffs on imports, President Obama’s move to slap a 35 per cent charge on Chinese tyres being a prime example. Such measures are provoking fury, and with good reason: the protectionist spiral into which the world plunged in the 1930s almost certainly contributed to the war at the end of the decade.
However, such visible signs of protectionism tell a fraction of the story. For the shocking truth is this: over the past year, the costs and obstacles faced by exporters have, according to a study by the economists David Jacks, Christopher Meissner and Dennis Novy, increased by almost the same scale as in the early 1930s, when the US and others were imposing a range of protectionist laws, including the infamous Smoot-Hawley Act.
Partly this is one of the perverse consequences of the financial crisis, which crippled the system of trade credit that underpinned the international flow of goods, making it impossible for some companies to ship products from one part of the world to another. But, far more worryingly, it is also a product of explicitly protectionist measures imposed by countries such as the UK in an effort to save their domestic banking systems from collapse. Most egregiously, these included so-called financial mercantilism, whereby governments, having rescued a bank, insisted that it had to lend far more to domestic customers than businesses or individuals overseas.
This new protectionism is a different beast from that of the early 20th century, but the result is the same. According to the Bank for International Settlements, the amount of money flowing across national borders has collapsed in a way never before witnessed. Financial globalisation, which helped power economic growth in recent years, has gone into reverse. All the more worrying is that it has done so without people noticing.
In the same way that the financial crisis, which at the time seemed an abstraction to many outside the City, prefigured a broader economic crunch, I fear that this surge in financial protectionism could be the precursor of more deep-seated conflicts. In a crisis, politicians’ first instinct is almost always to protect their own voters. With the next few years set to bring rising unemployment and decreased living standards, the temptation to erect more explicit barriers may become irresistible. The fact that the financial links between nations have already been stripped down will decrease any resistance.
But this is the thin end of the wedge. One of the bedrocks of global prosperity over the past few decades has been the liberation of capital markets, the fact that money has been able to move freely around the world. While it is something few are currently contemplating, it is no longer improbable that some might impose controls on the amount of cash moving in and out of their countries. Is it so crazy to imagine the US falling victim to such a temptation if China starts dumping its billions of dollars’ worth of American investments?
For anyone with a knowledge of economics, this is alarming. I have spent the past year writing a guide to the field. What struck me deeply was how important international trade is if we are to become more wealthy as individuals and nations. The point of the law of comparative advantage is that by sticking to what they are best at, all countries can become richer; that international commerce is not a zero-sum game where there have to be winners and losers.
But the economic logic is less powerful than this simple point: countries that fight in economic terms, with tariffs or financial barriers, are far more likely to want to fight in physical terms. That the Second World War was preceded by a collapse in world trade was no accident. The difference is that we have credible institutions – the G20, the World Trade Organisation – designed to prevent such a tragedy. If only they would do a better job of it.