SINGAPORE - As the world plunged into the Great Depression eight decades ago, governments tried to stem the damage by erecting trade barriers, and only made the crisis worse. The risk is growing that history will repeat itself.
The specter of beggar-thy-neighbor protectionism has emerged as a key global political risk in 2009. In the major industrial economies and in the developing world, faith in the benefits of globalization is being replaced by growing pressure from labor unions and corporate leaders to curtail free trade.
It is a classic example of the Prisoner's Dilemma -- it is in the interests of individual governments to try to safeguard domestic industry and keep key interest groups happy, but the overall result will be an even more painful global slump.
"Politicians struggling to develop a coherent policy response to the crisis, and in many cases also struggling with falling popularity ratings because of the worsening economic climate, will doubtless exploit the fact that foreign trading partners are an easy target," an Economist Intelligence Unit analysis said.
As in the 1930s, there is no effective global institution that can coordinate policy and escape the dilemma.
"We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty," the G20 declared after its November summit aimed at agreeing a global response to the crisis. Nations pledged not to raise trade barriers for 12 months and to revive the Doha round.
Yet Russia and India soon increased tariffs. There has been no movement on Doha. The G20 summit was billed as a historic meeting of countries representing 90 percent of global GDP, but clearly could do little to prevent the slide toward protectionism.
"The financial crisis exposed fundamental flaws in global governance," the World Economic Forum said in its 2009 Global Risks report this month. "Global risks know no borders and global solutions are also beyond the realm of any one government."
There is wide agreement among analysts that protectionism will worsen the crisis this year. The only question is how much.
The Economist Intelligence Unit forecasts global merchandise trade will contract 1.5 percent, assuming moderate protectionist measures. But, it added, "a more aggressive move against free trade could further undermine global economic conditions and prolong the downturn".
WASHINGTON AND BEIJING HOLD KEY
The key factors determining how far free trade will retreat will be the policies of two countries -- the United States and China -- and whether they can avoid a serious falling out.
The incoming U.S. administration is widely seen as leaning toward protectionism, raising fears of a repeat of the infamous Smoot-Hawley act of 1930 that worsened the Great Depression.
But several analysts say protectionist rhetoric during the campaign may not translate into destructive policy, citing the makeup of the cabinet and President Barack Obama's key advisers.
"Obama's cabinet nominations ... seem aimed at striking a balance between supporters of liberal markets and members who may be more skeptical of the merits of free trade," said Alastair Newton, political analyst at Nomura.
Nouriel Roubini, chairman of economic research firm RGE Monitor, said the appointment of Lawrence Summers as a top economic adviser would prevent major moves toward protectionism.
But protectionism can come in many forms. Besides import tariffs, bailouts like the massive auto industry rescue, and proposed measures such as a restrictive "Buy American" clause being discussed by Congress, may well be seen by other nations as unfair, setting off a spiral of retaliatory measures.
While other countries point the finger at Washington, the United States has been accusing China of trade-rule violations, and there are also concerns Beijing could push down its currency to boost flagging exports.
The worst case scenario is a major dispute between Washington and Beijing that spirals into a global trade war.
PREVENTING DISASTER
Despite the risks, many analysts argue that a wholesale retreat into protectionism can be averted, because globalization has brought benefits governments will not want to reverse.
"Fears that the financial crisis is ushering in an era of intensive nationalism and protectionism are overwrought," said Control Risks in its outlook for 2009.
"The financial crisis has ... demonstrated that the global economy remains deeply interconnected and dependent on forging compromises between domestic politics and international capital."
Cheap imports from emerging markets have brought significant benefits to consumers and companies in the developed world.
"This factor, combined with the entrenched nature of global supply chains, is likely to limit the political tolerance for protectionism, at least in the main developed-country markets and in emerging markets that are highly dependent on exports," the Economist Intelligence Unit said.
But few hold out hope for a revival of Doha any time soon.
Nomura's Newton, in an analysis of key geopolitical issues in 2009, said it was extremely unlikely the U.S. Congress would give early support to a renewal of Trade Promotion Authority, widely seen as a key hurdle to achieving agreement on Doha.
India, another player essential to breaking the deadlock, holds elections this year, further reducing the chance of an agreement, the Economist Intelligence Unit said.
And above all, analysts say, at times of economic crisis, political support for further trade liberalization evaporates.
"Whenever there is a U.S. and a global recession, further trade liberalization is dead on arrival, so Doha is dead ... for the time being," Roubini said.
"There is no chance of any meaningful progress on that."
The specter of beggar-thy-neighbor protectionism has emerged as a key global political risk in 2009. In the major industrial economies and in the developing world, faith in the benefits of globalization is being replaced by growing pressure from labor unions and corporate leaders to curtail free trade.
It is a classic example of the Prisoner's Dilemma -- it is in the interests of individual governments to try to safeguard domestic industry and keep key interest groups happy, but the overall result will be an even more painful global slump.
"Politicians struggling to develop a coherent policy response to the crisis, and in many cases also struggling with falling popularity ratings because of the worsening economic climate, will doubtless exploit the fact that foreign trading partners are an easy target," an Economist Intelligence Unit analysis said.
As in the 1930s, there is no effective global institution that can coordinate policy and escape the dilemma.
"We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty," the G20 declared after its November summit aimed at agreeing a global response to the crisis. Nations pledged not to raise trade barriers for 12 months and to revive the Doha round.
Yet Russia and India soon increased tariffs. There has been no movement on Doha. The G20 summit was billed as a historic meeting of countries representing 90 percent of global GDP, but clearly could do little to prevent the slide toward protectionism.
"The financial crisis exposed fundamental flaws in global governance," the World Economic Forum said in its 2009 Global Risks report this month. "Global risks know no borders and global solutions are also beyond the realm of any one government."
There is wide agreement among analysts that protectionism will worsen the crisis this year. The only question is how much.
The Economist Intelligence Unit forecasts global merchandise trade will contract 1.5 percent, assuming moderate protectionist measures. But, it added, "a more aggressive move against free trade could further undermine global economic conditions and prolong the downturn".
WASHINGTON AND BEIJING HOLD KEY
The key factors determining how far free trade will retreat will be the policies of two countries -- the United States and China -- and whether they can avoid a serious falling out.
The incoming U.S. administration is widely seen as leaning toward protectionism, raising fears of a repeat of the infamous Smoot-Hawley act of 1930 that worsened the Great Depression.
But several analysts say protectionist rhetoric during the campaign may not translate into destructive policy, citing the makeup of the cabinet and President Barack Obama's key advisers.
"Obama's cabinet nominations ... seem aimed at striking a balance between supporters of liberal markets and members who may be more skeptical of the merits of free trade," said Alastair Newton, political analyst at Nomura.
Nouriel Roubini, chairman of economic research firm RGE Monitor, said the appointment of Lawrence Summers as a top economic adviser would prevent major moves toward protectionism.
But protectionism can come in many forms. Besides import tariffs, bailouts like the massive auto industry rescue, and proposed measures such as a restrictive "Buy American" clause being discussed by Congress, may well be seen by other nations as unfair, setting off a spiral of retaliatory measures.
While other countries point the finger at Washington, the United States has been accusing China of trade-rule violations, and there are also concerns Beijing could push down its currency to boost flagging exports.
The worst case scenario is a major dispute between Washington and Beijing that spirals into a global trade war.
PREVENTING DISASTER
Despite the risks, many analysts argue that a wholesale retreat into protectionism can be averted, because globalization has brought benefits governments will not want to reverse.
"Fears that the financial crisis is ushering in an era of intensive nationalism and protectionism are overwrought," said Control Risks in its outlook for 2009.
"The financial crisis has ... demonstrated that the global economy remains deeply interconnected and dependent on forging compromises between domestic politics and international capital."
Cheap imports from emerging markets have brought significant benefits to consumers and companies in the developed world.
"This factor, combined with the entrenched nature of global supply chains, is likely to limit the political tolerance for protectionism, at least in the main developed-country markets and in emerging markets that are highly dependent on exports," the Economist Intelligence Unit said.
But few hold out hope for a revival of Doha any time soon.
Nomura's Newton, in an analysis of key geopolitical issues in 2009, said it was extremely unlikely the U.S. Congress would give early support to a renewal of Trade Promotion Authority, widely seen as a key hurdle to achieving agreement on Doha.
India, another player essential to breaking the deadlock, holds elections this year, further reducing the chance of an agreement, the Economist Intelligence Unit said.
And above all, analysts say, at times of economic crisis, political support for further trade liberalization evaporates.
"Whenever there is a U.S. and a global recession, further trade liberalization is dead on arrival, so Doha is dead ... for the time being," Roubini said.
"There is no chance of any meaningful progress on that."
