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Will Protectionism Override Globalisation?

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  • Will Protectionism Override Globalisation?

    Shari DaCosta

    Wednesday, March 11, 2009

    Trade - it's something people have engaged in for centuries, and while the underlying principle is the same, the scope and level of sophistication have increased. Since globalisation defines the world as we currently know it, economies have thrived on trade whether in terms of goods and services, capital or labour as it has been a major engine for growth. It has allowed businesses to cut costs (through outsourcing, for example), broaden target markets, achieve economies of scale and boost earnings.

    Shari DaCosta
    Over the past few months however, global trade has taken a sharp dive as consumer demand has also plunged worldwide. US imports have fallen about 25 per cent per month since July 2008 and Japan's exports have fallen 45.7 per cent year on year (yoy). And unfortunately, the more exposed a country is to trade, the greater the impact when other economies head south. Will the lesson we learn from this crisis be that the globalisation of world economies is about to gear into reverse? If it's a short-term lesson, then maybe, but in the long run it's very unlikely.

    The so-called "Asian tigers", which have solidified their place of the map among the world's largest exporters have felt the brunt of the downturn. Note that these are the countries with the most rapid economic growth that have been fuelling global growth in recent years. Singapore, whose exports account for 186 per cent of GDP watched its economy contract at an annualised rate of 17 per cent in the final quarter of 2008. Another Asian tiger, Taiwan has exports that amount to more than 60 per cent of GDP and its economy is forecasted to contract by as much as 11 per cent in 2009. Now that the world is in a recession, they have rates of decline that far exceed those of developed nations.

    As exports fall due to decreasing demand, Companies' are downsizing and affecting the overall economy. Governments, in turn, are taking action to support local businesses and workers through import tariffs and quotas or by subsidising local industries as a last resort. Even the United States, cheerleader of free trade, recently passed a stimulus package that contained protectionist language. Specifically, it includes a "Buy American" provision which requires that only US iron, steel and manufactured goods be used for public buildings and projects financed under the bill.
    France has also taken a move largely seen as nationalist by other EU members when President Nicolas Sarkozy announced a euro 6 billion plan to bail out France's car industry specifically, PSA Peugeot Citroen and Renault SA after a fall in car sales forced them to cut production. The government loans would be provided under the condition that French jobs would be protected.

    Generally, however, though governments may consider these measures for now as economies shrink and employment continues to dwindle, it is not in these countries' interest in the long term to apply protectionist policies. Firstly, it has been a shift towards free trade that has largely fuelled tremendous economic growth in many countries as open borders allow for a larger market for goods and services. A reversal of globalisation or closing of borders would essentially backpedal the development and growth to date.

    Still, it is impossible that economies will grow at the rapid levels previously seen in the near future. This is because the credit bubble created an artificial level of demand that cannot be met in the near term. At the same time, if countries turn their backs on each other, it will be that much more difficult for them to generate demand (or supply for that matter) anywhere near previous levels.

    Another reason nationalism will fail to triumph in the long term is that historically, the results were vastly unsuccessful in terms of driving growth. Therefore, it is unlikely that countries will return to the extreme protectionist measures they adopted before. Consider the United States Smoot-Hawley Tariff Act of 1930, following the 1929 stock market crash. The blatantly protectionist legislation saw the United States raise tariffs on imported goods to record levels. Shortly after the legislation passed, the country's trading counterparts retaliated, increasing their own tariffs on US goods. The result was a plunge in US trade by more than 50 per cent. Many economists think that the measure helped fuel the sharp decline in world trade by 66 per cent between 1929 and 1934. The effect would only be escalated now that the extent to which countries are interlinked has increased significantly.

    As a result, despite constant discussions regarding nationalism, "de-globalisation" and the end of free trade as we know it, the nostalgia for booming exports, and thus GDPs will be too intense for protectionism to prevail in the long run.
    Shari Da Costa is a research analyst at Stocks and Securities Ltd. email:dacostas@sslinvest.com

    http://www.jamaicaobserver.com/magaz...ALISATION_.asp
    "Jamaica's future reflects its past, having attained only one per cent annual growth over 30 years whilst neighbours have grown at five per cent." (Article)

  • #2
    More protectionism better come...or dawg nyam wi supper!

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