The Independent Market Observer

Economic Shock

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jun 14, 2012 1:06:25 PM

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But not, perhaps, what you are thinking of. The economic shock I’m referring to happened a couple years ago at a conference given by Capital Economics, a consultancy we use. There, for the first time, I heard a very accomplished and respectable economist make a case for protectionism. I was stunned.

Not, he hastened to add, that protectionism was a good thing overall—it wasn’t—but he believed that the U.S. could potentially be better off with the imposition of some trade-limiting measures. Although we might have to pay for this benefit with larger losses elsewhere, the U.S. would be better off on a net basis.

Wow, I thought. If a very good economist is telling me this now, there must be many think tanks and governments well ahead of where he is—and we will be hearing more about protectionism in the future.

And, sure enough, here we are. In today’s Financial Times, an article titled “Economic Gloom Puts Free Trade at Risk” outlines how protectionism is creeping back not only into the debate, but also into actual policy around the world. It references the worrying report just released by the World Trade Organization (WTO), which states that “[f]or the first time since the beginning of the crisis in 2008, this report is alarming.” The EU also released a report last week that said that increases in protectionism are “staggering.”

Overall, the WTO estimates that about 4 percent of G20 (the developed world) trade is affected by trade measures imposed since 2008. Private estimates are much higher, and the problem is getting worse.

There are a couple of factors driving this. The political factor—protecting local jobs and local businesses—is the most obvious and the easiest sell domestically. There will always be a strong lobby for benefits to a few if the costs are spread among the many. Put another way, robbing Peter to pay Paul will always get Paul’s vote.

Less obvious is the geopolitical component of such measures. To take an obvious example, for the U.S. to start limiting its exposure to Chinese manufacturing would arguably both promote U.S. manufacturing companies and jobs and limit Chinese growth. This would be paid for in the form of higher prices for U.S. consumers, but from a geopolitical perspective, the government might consider it a price worth paying. I am well aware of the arguments against this—but it is the case that might be made, as noted at the start.

This is a story that we will be revisiting in the future, I am sure. Whether it plays out as a net benefit or not, the political benefits alone almost guarantee that governments will continue to go down this road.

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