Despite pledges, protectionist threat won't go away

The threat of protectionism just won't lie down, despite repeated promises of political leaders to refrain from raising barriers to trade.

For many policy-makers and economists, attempts to save jobs by blocking imports and promoting exports at the expense of competitors could wreck efforts to tackle the economic crisis.

In the latest examples, French President Nicolas Sarkozy called on the European Union to protect its industries in the same way the United States does, and an economist at a Chinese government think-tank said Beijing should make contingency plans to retaliate against the United States for protectionism.

There is one global threat that could really derail all the effort that is being already applied to control this major crisis and of course that huge threat is protectionism, said former Mexican President Ernesto Zedillo.

Despite the multitude of statements against protectionism made by leaders and finance and trade ministers in recent months I think it would be irresponsible not to acknowledge that the mercantilist specter is knocking at everybody's door, Zedillo, who steered his country through the 1994/95 Tequila crisis and 1997/98 Asian crisis, said in a lecture in Geneva on Tuesday.

DOWNWARD SPIRAL

Globalization -- the integrated world economy -- makes the crisis devastating even without protectionism, as weakness in one country is transmitted to another through lost exports.

Germany -- the world's biggest exporter -- suffered its biggest fall in gross domestic product since reunification in 1990 in the last quarter of 2008 thanks to a sharp drop in exports, the government announced on Wednesday.

Japan's exports nearly halved in January from a year earlier as the global recession deepened.

And China, the world's second biggest exporter, suffered a record 17.5 percent fall in exports in January, figures two weeks ago showed.

But the fall in imports was even bigger -- 43.1 percent -- reflecting sagging domestic demand and boosting China's trade surplus: a red light for those in the United States and Europe calling for protection against unfair competition.

But raising barriers against trade could intensify that downward spiral in exports, output and jobs.

We can have a perverse cycle of negative feedback between recession and protectionism, and unfortunately this is no longer a reminiscence of the 1930s but a possible scenario, said Mexico's Zedillo, now an economics professor at Yale University.

In a speech to the U.S. Congress on Tuesday, Obama renewed the pledge that the biggest economies would refrain from erecting trade barriers.

We are working with the nations of the G20 to restore confidence in our financial system, avoid the possibility of escalating protectionism, and spur demand for American goods in markets across the globe, he said.

But since leaders first called late last year to avoid protectionism, a series of measures -- now being tracked by the World Trade Organization -- has thrown sand in the wheels of global commerce.

The most prominent is the Buy American provision in the $787 billion U.S. stimulus bill, requiring the use of U.S. steel and other goods in government-funded infrastructure projects.

President Barack Obama watered this down to meet the letter of the international trade law, but the fact is it will shut big emerging economies like Brazil, India and China out of the U.S. government procurement market -- precisely the countries the United States wants to see open up to American goods.

It was this that Sarkozy had in mind when he called for matching European protection.

But France and the broader European Union are no novices when it comes to protecting their own markets.

Sarkozy upset EU partners with a plan to support French carmakers provided they keep factories open in France, and the European Union outraged other farm producers with its reintroduction of export subsidies for dairy products.

China too is the frequent target of complaints that it blocks access to its markets or gives unfair help to exporters.

For politicians faced with voters worried about their jobs or eager to see government bailouts deliver the goods at home, the populist response is tempting.

But it can also turn out to be more costly.

For instance favoring domestic producers in the capital-intensive steel industry over more competitive foreign rivals leaves less money for other job-creating projects.

WTO Director-General Pascal Lamy, currently in Asia to bolster support for open markets, declined to comment on Sarkozy's latest call.

But in Seoul on Monday he recalled how a trade-driven growth policy had transformed South Korea from a country 50 years ago with income per head less than that of Senegal or Bolivia to the world's biggest shipbuilder and fifth largest carmaker.

Lamy did not spell out the contrast, but some 50 km away is the prime example of a country that has put protectionism and autarky at the heart of its economic development -- North Korea.