Resisting the perils of protectionism

We live in highly perilous times. The resurgence of protectionism and the breakdown of the tenuous global trade peace represent some of the greatest perils. On the basis of current trends, such an outcome seems inevitable. It is simply a question of when. While alarmists at the time of the 2008 great recession envisaged something comparable to the outright trade wars of the 1930s, in fact the early 21st century has witnessed more what Simon Evenett founder of Global Trade Alert terms “murky protectionism”. Murky protectionism takes many forms; it is more subtle than the 1930s vintage, but also more invidious and certainly viral. Furthermore while the G20 states appointed themselves the custodians of the open global market economy, their murky trade policies have egregiously violated the letter and spirit of the rules. Rather than provide leadership, the G20 countries have been driving the protectionist trends.

Protectionism traditionally is interpreted as those measures preventing cross-border trade flows in goods and services. The GATT/WTO regimes do not cover investment. This is a flagrant omission. Whereas when the rules were established in the late 1940s and early 1950s investment could be separated from trade – at a time when foreign investments were few – this has been for some time no longer tenable. Trade and investment are fully intertwined since most trade is inter-or-intra-corporate (ie occurring within or between firms) and hence reliant on direct foreign investments. This is all the more the case now that the global economy is driven by supply chains that have significantly redefined the paradigm of manufacturing, services and trade. Murky protectionism has been spreading contagiously to investment.

James Bacchus, Victor K. Fung, Harold McGraw III and Gérard Worms of the International Chamber of Commerce (ICC) have rung the alarm bell in an article entitled It’s Time to Stop Investment Protectionism. Increased cross-border investment flows are imperative to “stimulate economic growth and prosperity across the globe”, they assert, hence foreign investments should be promoted and the regimes for foreign investors improved – the very opposite of what is occurring. The ICC is seeking to provide an impetus to that end through having issued revised Guidelines for International Investment.

Trends can be reversed. The efforts of the ICC are clearly in that direction. But the challenge remains formidable, not just because of the populist opposition to an open global market economy driven by rising unemployment, but also because of the very tepid (or indeed worse) support from business. There can be little doubt that a major cause of the death of the Doha Round was lack of support from business; especially, but not exclusively, US business. The ICC has been less the “voice of business” than a voice crying in the global economic wilderness. With an emphasis on short-termism, narrow sectorial interests and quick fixes business leaders, with some notable exceptions, have failed to stand up for the principles and practice of free trade. In particular while many business leaders have associated themselves with “export offensives” they have ignobly failed to make the case that in order to export one has to import. They have allowed the mercantilist notion to spread that exports are good, while imports are bad. Populist protectionist rhetoric has been especially virulent in respect to “offshoring”, which has now become a four-letter word rather than recognising the significant benefits offshoring brings to both producers and consumers.

The ICC must be commended and encouraged to pursue promoting the cause. Were it able to convene, say, 500 leaders of global business to proclaim that imports are not only good, but absolutely essential, this could potentially have a very positive impact. A global import campaign could be a forceful initiative in preparation for the next G20 summit. It is due to be held in St Petersburg. With Russia having only recently joined the WTO and hence the open global market economy, it could be an auspicious occasion. (Then again, it may not: but it is certainly worth trying!)

This article was first published by the Fung Global Institute and is posted with permission.