Wednesday, March 4, 2009

Nose-diving exports; Rising Unemployment; Fiscal Policy.....Trade Protectionism

With the global recession hitting exports particularly hard, the incentive to protect trade - the key engine of growth for many economies - has emerged. In my opinion, trade protectionism presents one of the biggest downside risks to the global economic outlook.

Protectionism now is widespread, but not as transparent as in previous times; and furthermore, current protectionist measures are unlikely to foster a global trade war like in the 1930's under the Smoot-Hawley Tariff Act. But what we do know, is that the export plunge and rising unemployment is (almost) ubiquitous , and countries will take action that is slightly less transparent ways to protect domestic industries.

The chart illustrates global annual export growth rates in December 2008 for most countries or Janaury 2009 for some (indicated). One of the defining characteristics of this global recession is the sharp decline in export demand that many key economies depend on to fuel economic growth (Germany, Japan, Canada, China, etc.). Some, however, are seemingly immune to the export plunge - Australia and Vietnam. But don't let this graph fool you: Australia's 6% annual export growth rate is well below its average from 2006 to 2007, 16%.

Protecting domestic industries can take many forms that go well-beyond your basic trade barriers: tarriffs, export subsidies, quotas, embargoes, etc. For example, Germany, Austria, Belgium and Denmark maintain work restrictions against citizens from newly-membered EU states:
As pressure increases on national governments to protect their employees' jobs, Scholz said Berlin was not prepared to allow workers from the European Union's newest members to look for work in Germany.

"Jobs are under threat," Scholz told the Bild newspaper on Monday, Feb. 23. "Now is not the time for a rapid opening of our labor market to all workers from the new European Union member states.
Closing borders to worker migration is just one way that a country can protect its domestic industries. The RGE Monitor discusses alternate protectionist mottos, including financial protectionism and labor protectionism. Here is what the EU Industry Commissioner Guenter Verheugen said in response to government support in Europe and the U.S. of their domestic auto industries:
"We have no interest in the collapse of the US car industry, but what happens there to help them must follow international rules," EU Industry Commissioner Guenter Verheugen said on Wednesday, Feb. 25. "We will not hesitate to take the necessary steps if that should not happen."
This is slightly scary stuff. Further protectionism is a path that I hope global economies do not follow.

Rebecca Wilder


  1. How could they not? I can't see how most of them will be able to resist the political pressure for protectionism. And I can't see how if several protectionist policies get enacted, how that wouldn't cause retaliation. They'll either bow to the pressure now or get elected out with someone who will.

  2. But, as you imply, so easy to fall into in any country. The uproar over parts of the US stimulus package show that all are looking out for it.
    OK, so that makes it inflation plus protectionism - what else should we be awaiting?


    Food shortages AND protectionism!!

    Since the food will be needed "here" it cannot be sold to "foreigners" by any government that wants to Live.

    Pakistan will fall apart into anarchy before 2015 resulting in a regional war OR the government steps up to the plate and finishes the ongoing civil war by purging society of jihaddists.

  4. Hey Rebecca,

    Are there any specif laws restricting increased protectionism? I don't really know how you can blame these countries from restricting labor to their citizens -- as you said unemployment is nearly ubiquitous.

    Was Verheugen statement a reaction to government support (of US automakers) because it happened in Europe (not just in the US)?

  5. HI Tim,

    I am only aware of the WTO's surveillance of trade barriers within the member countries.

    The way that I read the quote, is that the EU is slightly annoyed by the U.S. auto aid. Our labor markets are very different from theirs.

    Hi Fanjensen,

    Food shortages and food inflation is a very prevalent problem, especially in poorer countries. Thanks for the point there!

    Hi Janie,

    There are so many shoes to drop - don't forget the state and local governments (domestically).

    And irrational, This is a crisis, and workers are going to treat it as such. Did you read the article in the the WSJ today about the British labor market?

    Thanks all for commenting! Rebecca


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