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As it’s always been when the economy is in crisis, a wave of protectionism is swelling around the world. Policymakers tend to believe that imports coming in are the reason why the economy is in bad shape. To punish the bad guys who are apparently exporting too much an importing too little, these simple-minded politicians think they only need to impose tariffs on imports from other countries or ban certain imports completely. However, while such policies might have a short-term welfare improvement for the respective country, the country’s export industry will suffer even more. Therefore politicians should not jeopardize the jobs of workers who are still having a job in an export-oriented industry in an attempt to secure the jobs those who are in an industry that can  hardly survive.  

Some protectionist actions could be seen recently in India which plans to ban the use of imported iron and steel, but also in Russia, China and the United States. Understandably, politicians want to make sure that taxpayer money from economic stimulus packages is not spent abroad, but these protectionist actions easily result in a chain reaction whereby countries impose import barriers and raise import duties to retaliate on each others protectionist measures.

Some European nations, most notably France, partly for historical reasons, are especially susceptible to protectionism. In order to help struggling car makers Peugeot-Citroen and Renault stay afloat, the French government is planning a 6 billion euro, or 7.7 billion dollar bailout for the country’s auto industry. In return, the government demands that the companies don’t outsource car production to low-wage countries and agree not to shut any French factory and cut jobs. Furthermore, the French President Nicolas Sarkozy demands that both car makers order parts from French suppliers rather than from foreign competitors.

This plan clearly breaks the rules of the European single market. Now it’s the European Commission’s task to examine the planned 5-year low interest rate credit and disapprove it if necessary. Members of the Commission and numerous other European countries have already voiced concerns and accused French President Nicolas Sarkozy of protectionism. Obviously, Mr. Sarkozy tends to promote short-sighted national ideals over long-term growth and a co-operation. There’s lots of disunity among European leaders on addressing the slowdown. In a number of emergency summits in the next few weeks, Europe’s top politicians will debate how to avert that protectionism threatens the ratification of the Lisbon treaty and how to take toxic debt off bank balance sheets to make sure banks quickly resume lending. 

While I don’t doubt that Nicolas Sarkozy primarily wants to help the employees of French car makers in France, it’s also true that he is about the undermine the future competitiveness of Renault, Peugeot-Citroen and the entire French auto industry. His so-called “national champions” won’t be able to survive in a market insulated from the world market.

It’s perfectly clear that we won’t overcome this crisis by turning inward. Global trade must resume since it is the only way to stabilize the global economy. This being an unprecedented global crisis of a frightening magnitude, the solutions must be global, too. During the Great Depression, protectionist policies accelerated the downturn and eroded the basis for future growth.

Especially export-oriented countries are hard hit by the crisis. Germany still being the global “export champion”, the GDP of Europe’s largest economy will contract decisively in 2009. Since the auto manufacturing is a core industry in Germany, the country is in as serious trouble as e.g. Great Britain which is haunted by its status as Europe’s financial center. China - which has risen to an economic superpower by exporting at all costs and creating gigantic trade imbalances by accumulating trade surpluses while the U.S. slid into ever deeper debt - is now struggling to maintain its economic growth and stability. So far, about 20 million migrant workers have lost their jobs, half of the toy exporters have been wiped out in 12 month and January exports have fallen 17.5% since last year. Neighboring Japan is not better off either. Japanese exports collapsed due to the overly strong Yen, falling demand globally and traditionally reluctant consumers. Japan’s economy is contracting at the fastest pace since the 1974 oil crisis. Exports fell by 23 % in the fourth quarter of 2008 and almost all big corporations - be it Toyota, Nissan, Panasonic, Toshiba or Sony - are forecasting record losses for 2009. Since the Japanese government has refused to intervene boldly - unlike other governments - the Japanese economy is contracting faster than Europe’s or the United State’s.

With U.S. consumers reducing their spending and trying to balance their budgets, the U.S. trade deficit is shrinking. Nevertheless, the U.S. is also a major exporter of goods and services which should be taken into consideration by politicians in Washington D.C. who are wrangling over the details of the recently-passed stimulus package. Luckily, U.S. President Barack Obama appears to be aware of the dangers of protectionism:

“Just as there are a lot of folks in Illinois or St. Louis or Missouri that are concerned about imports coming in, there’s probably an equal number of folks whose livelihoods depends on exports going out” http://www.stltoday.com/stltoday/news/stories.nsf/politics/story/94E703DFC63BCD428625755B000A2D33?OpenDocument

Check out my post on the collapse of the WTO talks aimed at liberalizing international trade: http://www.whatmattersweblog.com/global-economy/

http://www.google.com/hostednews/afp/article/ALeqM5hnZgvoSSIWabEdL5eY9IHtrfqtfA

This entry was posted on Thursday, February 12th, 2009 at 12:56 PM and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.