Opinion Is Protectionism Really All that Bad?

Banks have been nationalized, manager bonuses limited and huge public debts accumulated. Indeed, about the only element of recent economic thought that remains taboo is blind faith in free trade. That might be a mistake.

By Noreena Hertz

The mood is sombre. They know that they are facing the greatest global economic crisis ever. They acknowledge that the crisis was man-made: the outcome of extreme-risk taking, a shameful lack of oversight, and a complacent blindness to the downside of untrammelled free market economics. They are nervously conscious that decisions will have to be made without reference to the very tools and theories that they have relied on for the past 30 years.

Free trade has become an untouchable tenet of the global economy.

Free trade has become an untouchable tenet of the global economy.

These leaders are in uncharted waters. Waters that churn and spew out conventional wisdoms, economic laws and long accepted axioms at breakneck speed as one-by-one they prove themselves ill-suited for these times.

The absolutism of the key tenets of neo-liberalism: privatisation, deregulation, balanced budgets have all been rejected by all but the most dogmatic. Apart from one that is: the primacy of free trade.

Its status is basically sacrosanct. While banks are being nationalized, bonuses recalled, and trillions of dollars of debt racked up, while pretty much every other concept, belief or ideal is being interrogated, contorted or just set aside, "Free trade is good" continues to be presented as a totemic truth, ring-fenced from debate or interrogation. Any questioning of this axiom is not even on the G-20's agenda.

In fact the Free Trade brigade, which encompasses most mainstream politicians, business leaders, and thinkers -- outside of France that is -- seems to be on evangelical overdrive. "The solution to the crisis is more free trade," says Brazilian President Luiz Inácio Lula da Silva. China's Commerce Minister Chen Deming announces that Beijing is "firmly opposed to trade protectionism," a sentiment often echoed by Germany's Chancellor Angela Merkel, while British Prime Minister Gordon Brown expressly warns against abandoning "the gospel of free trade."

"The gospel of free trade." What an extraordinary thing to say. Surely what the last few months have taught us is that there is no economic or financial principle that we should not be challenging, interrogating, questioning.

Moreover their dogmatism smacks of duplicity. Brown's anti-protectionist stance can hardly be reconciled with his "British jobs for British Workers" battle-cry. And it's not just Brown, a new World Bank report states that 17 of the G-20 countries have in recent months set up protectionist barriers.

So we have countries publicly preaching free trade, but on the sly making protectionist moves. Such dissemblance creates two problems. It fosters distrust between nations -- at a time at which without trust there's almost no chance that a collective solution to the crisis will be reached.

And, it also sends out a dangerous message to domestic electorates that their leaders are unwilling to embrace the intellectual honesty and flexibility that is needed right now to question absolutely everything they have held dear in economic policy over the last three decades, no caveats.

We urgently need a frank, honest and grown-up discussion about the final frontier of neo-liberalism -- free trade. And we're not getting one.

Instead we get scaremongering. "Remember the 1930s; don't take us back there." This isn't even an accurate representation of the past. Leading economic historians now explain the collapse of world trade in the 1930s not as a result of protectionism, but because of shrinking demand and a lack of trade credits.

We also continue to be presented with a false dichotomy -- free trade versus protectionism. What we actually need is a nuanced analysis of where on the free trade/protectionism scale individual nations need and want to be positioned, and what the implications of that would be.

The ability to openly have this discussion is particularly vital at a time when countries are under huge pressure from their electorates to protect jobs and businesses, and create compelling narratives about their own recovery. This is especially important given that, when used specifically and for a limited time, as Sweden and Japan did in the aftermath of the 1970s oil shocks, protectionism can be the lifeline a struggling country needs to survive. It can provide the breathing space an economy needs to retrench and retool its industries and workers.

I'm not advocating trade warfare, nor am I proposing that powerful countries be allowed to erect trade barriers with impunity. It's just that I don't think protectionism should be seen as a non-acceptable taboo. Instead we should see protectionism as a tool in nations' armouries that can be deployed to help address their local economic freefall, but is also capable of creating far-reaching collateral damage. Its use therefore needs to be sanctioned by the global community, practiced with caution, and within guidelines. Perhaps there is a role here for the WTO to play, not in enforcing the letter of the free trade law, but in adjudicating as to what is fair and right for now.

If such a system of adjudication had been in place it could, for example, have meant that the UK would not have lost large swathes of investment in its wind farm industry, as it did last week. It turned out that other countries had been providing far more significant subsidies and grants -- which are trade barriers of a kind -- than the UK. In fact protecting nascent industries within the environmental sector might be absolutely essential for some countries to meet their key emissions reductions targets, while at the same time ensuring energy security. For the poorest countries in the world, being granted a period to nurture and tend to some of their industries may allow them to develop sectors with the requisite resilience to then withstand the rough and tumble of the global marketplace.

This week's G-20 meeting will show us whether the world is led by intellectual sophisticates or a dogmatic generation unable to respond powerfully and flexibly to our economic nadir. Productive trade arrangements will be pivotal to our collective futures. So rather than simply re-stating old beliefs about the supremacy of free trade, the G-20 should place it firmly under the microscope. For surely if we have learnt anything over the past few months it should be that economic axioms are at best schools of thought, and that wisdom comes not from blindly accepting convention but from questioning, interrogating and challenging what we think we know.


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