Eighty years after the 1929 crash, scholars keep arguing about the roots and causes of the great Wall Street panic. Economists, however, unanimously agree on what turned the crisis into a painfully long lasting global recession. Protectionism. It was the protectionist wave that swept the world after 1929 what undermined the first globalization project, killing a win-win trade context to force each and every industrialized nation into a fight for resources that would only end with World War Two. Bringing about the end of the British empire and a long and painful division for Europe. Now, when the second globalization project has brought the world to the highest material standards ever seen, another crisis of financial origin threatens to unleash the same protectionist answer. The same protectionist mistake.
In Europe, ministers ask consumers to buy national products while, even worse, the United States Senate wants to turn protectionism into an official policy including a “buy American” clause in the latest stimulus package. An urgent cry of alert should be issued. Protectionism is the shortest way to misery. It is true that the US and many other industrialized nations have been running enormous trade deficits for years. Massive deficits that weaken their economic balance. It is then easy for some shortsighted politicians and so called economists to pretend that by buying national, by switching from imports to home manufactured product, there will be a sales boost inside their borders creating an ever growing virtuous cycle. It is almost ridiculous having to explain it but these last three centuries economies have gotten a little bit, just a little bit, more complex than that.
Advanced economies can sustain trade deficits through capital inflows. Benefit repatriations from offshore operations, foreign investment and international capital allocation. Those are some of the reasons behind Gross National Product (GNP) taking the lead as a reference indicator in front of traditional Gross Domestic Product (GDP) data. It is true that a more balanced current account is a fair objective but protectionism has a high price. Too high a price. Any serious project pretending to reduce the US trade deficit needs to be based on offering more competitive products and services both inside and outside national borders. Competitivity is the key.
Pretending that European or American consumers can benefit from buying worse products at more expensive prices is funny enough, but the real protectionist threat is a chain reaction of international retaliations and counter-retaliations that could demolish the free trading world built during the last decades. It is not realistic to pretend that Canada, the European Union or China will sit down and watch a “buy American” trend being trumpeted from the White House and Capitol Hill. Threats are already starting and should not be taken lightly.
Marc Arza
Senior Consultant
futura.cat
4th February, 2009 a les 9:24
It was about time that somebody stepped out in defence of free markets. The answers to the crisis are much more dangerous than the crisis itself.
Good article!
Peter
5th February, 2009 a les 12:24
I’m all for free markets, but anyone who has ever bought anything from China on ebay will know that while American products may well be dearer, they are anything but inferior!
5th February, 2009 a les 14:47
Peter,
Thanks so much! I do agree with you, we may end up in worse shape than before any measure was taken.
Whisgangsta,
My experience with China is that Chinese products are exactly what you pay for. You can buy cheap and get cheap products or buy good technicaly advanced products at a very cost/benefit rate. Chinese can manufacture extremely good products with very high quality because we have taught them to do it. Any Fortune 500 manufacturing in China has moved there their Quality Dept. applying the same control systems they used in their home country.
Although when thinking about Chinese products we always think first of cheap electronics, textiles and toys, very complex industries like basic biochemichals are only manufactured in China since many years ago.
Thank you for your coments,
Marc Arza
5th February, 2009 a les 15:29
Reverse globalisation ?? Control of tax dollars from offshoring?.. More ITAR Controls ?? If the whole intention is to stimulate the creation of American jobs .. –> going to be the wrost night mare in India..
10th February, 2009 a les 3:27
Protectionism is a very difficult subject because it is right at the intersection between political realities and economic idealism. While solving a current account deficit is a goal, the I believe the motivations for protectionism are slightly different. The problem with having completely open borders is that in the interim (the short term that lasts until labor is effectively relocated) there is great suffering for the general population (and consequently political instability) unless some measures are taken. It takes the better part of a generation where workers are able to learn the skills necessary to work in a new economy. If all of a sudden Africa became the manufacturing hub, what would Chinese workers do? It makes sense to delay the inevitable for a few years while these changes take place. The problem is how far do you go? Politics being politics, how much protectionism actually helps the transition, and where does protectionism start to impede trade and growth? Globalization is a complex issue and simply opening everything would be the ideal solution, but to do that everyone has to play along… the markets aren’t perfect, as we have witnessed through this financial situation we are currently in.
In response to ideas about China, there are a lot of concerns other than just price and quality. It is clear that many Chinese executives have a different idea of morals and what is “right” and “wrong” than what we believe in the west (i.e. the melamine scare). This is simply a case of different cultures, but it still creates value in local manufacturing and for purchasing domestic products.
11th February, 2009 a les 3:00
The Chinese are extremely “competitive” because they use slave labour. This is the sort of competition that we face. Without protectionism, it means that the living standards in the West will experience a sharp decline and this is something our society is not ready for.
Competition is good to some extent. It’s not good by definition. The same can be said about protectionism. In the 18th century the English used protectionism to their own benefit with great success. For years they banned all exports of technology. Engineers in continental Europe had to reverse engineer looms and spinning wheels and so they were always behind the English, competing with obsolete technology against the English who were using state-of-the-art devices.
11th February, 2009 a les 8:31
Cikran,
The funny thing is that reverse globalization would be as much of a nightmare in the US as it would be in India. Reverse globalization would be a loose-loose game!
Domenic,
Changes never happen all of a sudden. It took China 25 years to become the manufacturing Juggernaut it is. In fact, if many industries (and its workers) in the US and Europe have not recycled during this quarter of a century is because of protectionism and the cushioning of market trends.
Crimes like the Chinese melanine affair do not happen only in China, there have been similar affairs in the western world. I remember the “colza” oil that killed many in Spain during the 80’s.
12th February, 2009 a les 7:58
el “Primo”,
Labour rights and working conditions depend on hte stage of development tha a country is at. What you may consider “slave labour” is a pretty good salary an working schedule in some regions of China, India and the like.
Almost all countries have used protectionism at the beginning of their industrial development, as England did, but that is not the present situation of the US, Europe and Japan. Going back to protectionism when havig a fully working economy would be crazy.
Sincerely,
Marc
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