My country, boom or bust

Why economic nationalism is unpatriotic.

Carolyn Steel | June/July 2009 issue

As the world economy plunges into recession, globalization is going into reverse. A virtuous circle of rising trade and booming economic growth has turned into a vicious spiral of plunging demand and collapsing trade. Faced with the most severe downturn since the Great Depression, governments promise not to repeat the mistakes of the 1930s. At the G-20 summit in Washington, D.C., last November, leaders of 22 of the world’s major economies pledged to reject protectionism. Yet they aren’t living up to their commitments.
Around the world, economic nationalism has surged in finance, trade, investment and the labor market. Government-supported banks are being directed to keep their lending national. Politicians are urging us to keep spending local; the U.S. fiscal stimulus package contains explicit “Buy American” provisions. Asian countries are responding in kind. Mexico has announced trade sanctions against a variety of U.S. imports in retaliation against Congress’ move to keep Mexican trucks off American roads. Russia has raised a host of import tariffs. India has banned Chinese toys for six months. Immigration rules are being tightened, and foreign workers urged to leave. European Union (EU) members are falling out among themselves. France’s president, Nicolas Sarkozy, has called on French carmakers to “repatriate” their production from East European assembly plants. In Britain, strikes against foreign workers have targeted EU laborers who have the right to work there freely.
The logic behind this economic nationalism is simple but misguided: If the economic pie has shrunk, all the more reason to ensure that what remains goes to hungry local workers and businesses. But if everyone fights to keep more of the scraps, there will be even less to go around. Why? Because protectionism is a tax on trade, which depresses global demand further. Raising the cost of imports reduces people’s purchasing power, hitting the poor hardest. And since one country’s imports are another’s exports, demand for traded goods drops. Higher taxes and lower exports are a surefire way of deepening the recession. While governments everywhere are boosting spending and cutting taxes to stimulate the economy, protectionism behaves like the opposite of a fiscal stimulus.
Because protectionism depresses demand, it also costs jobs. For every job preserved in arenas that compete with imports, others are lost. Making U.S. steel more expensive, for instance, may protect some jobs in that industry at the expense of others in viable companies such as Caterpillar that rely on affordable steel. Likewise, making it harder for foreigners to work in a country—or worse, expelling those already employed there—reduces demand for the goods and services they consume and reduces employment for those who make them. Fewer foreign construction workers mean fewer jobs for local people selling building supplies and for interior designers, not to mention those who meet their basic-living needs.
Protectionism doesn’t just reduce demand, it adds to the economy’s dislocation. The last thing a high-tech company that’s already starved of credit needs is to be deprived of valuable foreign workers too—especially since their brainpower will help drive the eventual recovery.
It’s sometimes claimed that “temporary” protectionism would offer breathing space for firms and workers to reinvent themselves. But protectionism doesn’t provide the right incentives for it. Companies that have a captive local market tend to milk it, rather than seeking more competitive markets overseas—especially if prevented from doing so by others’ protectionism. And while protectionism may start off as “temporary,” companies that benefit have every incentive to find new reasons to maintain it. Just look at the EU’s Common Agricultural Policy, originally designed to prevent Europeans from starving; its lavish subsidies and high tariffs now keep out non-EU food. Protectionism obstructs the world economy’s ability to adjust, rather than encouraging it.
The way to break the destructive spiral is through coordinated fiscal and monetary action to boost global demand, and by nationalizing and restructuring the zombie banks dragging the economy down. Employment could be supported with big cuts in payroll taxes, along with aid to help workers retrain and find new jobs. Economic nationalism comes at the risk of turning this nasty recession into a depression. There is a better way.
Philippe Legrain is the author of Open World: The Truth About Globalization and Immigrants: Your Country Needs Them. His new book is about the future of globalization. Read more at www.philippelegrain.com.

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My country, boom or bust

Why economic nationalism is unpatriotic.

Carolyn Steel | June/July 2009 issue

As the world economy plunges into recession, globalization is going into reverse. A virtuous circle of rising trade and booming economic growth has turned into a vicious spiral of plunging demand and collapsing trade. Faced with the most severe downturn since the Great Depression, governments promise not to repeat the mistakes of the 1930s. At the G-20 summit in Washington, D.C., last November, leaders of 22 of the world’s major economies pledged to reject protectionism. Yet they aren’t living up to their commitments.
Around the world, economic nationalism has surged in finance, trade, investment and the labor market. Government-supported banks are being directed to keep their lending national. Politicians are urging us to keep spending local; the U.S. fiscal stimulus package contains explicit “Buy American” provisions. Asian countries are responding in kind. Mexico has announced trade sanctions against a variety of U.S. imports in retaliation against Congress’ move to keep Mexican trucks off American roads. Russia has raised a host of import tariffs. India has banned Chinese toys for six months. Immigration rules are being tightened, and foreign workers urged to leave. European Union (EU) members are falling out among themselves. France’s president, Nicolas Sarkozy, has called on French carmakers to “repatriate” their production from East European assembly plants. In Britain, strikes against foreign workers have targeted EU laborers who have the right to work there freely.
The logic behind this economic nationalism is simple but misguided: If the economic pie has shrunk, all the more reason to ensure that what remains goes to hungry local workers and businesses. But if everyone fights to keep more of the scraps, there will be even less to go around. Why? Because protectionism is a tax on trade, which depresses global demand further. Raising the cost of imports reduces people’s purchasing power, hitting the poor hardest. And since one country’s imports are another’s exports, demand for traded goods drops. Higher taxes and lower exports are a surefire way of deepening the recession. While governments everywhere are boosting spending and cutting taxes to stimulate the economy, protectionism behaves like the opposite of a fiscal stimulus.
Because protectionism depresses demand, it also costs jobs. For every job preserved in arenas that compete with imports, others are lost. Making U.S. steel more expensive, for instance, may protect some jobs in that industry at the expense of others in viable companies such as Caterpillar that rely on affordable steel. Likewise, making it harder for foreigners to work in a country—or worse, expelling those already employed there—reduces demand for the goods and services they consume and reduces employment for those who make them. Fewer foreign construction workers mean fewer jobs for local people selling building supplies and for interior designers, not to mention those who meet their basic-living needs.
Protectionism doesn’t just reduce demand, it adds to the economy’s dislocation. The last thing a high-tech company that’s already starved of credit needs is to be deprived of valuable foreign workers too—especially since their brainpower will help drive the eventual recovery.
It’s sometimes claimed that “temporary” protectionism would offer breathing space for firms and workers to reinvent themselves. But protectionism doesn’t provide the right incentives for it. Companies that have a captive local market tend to milk it, rather than seeking more competitive markets overseas—especially if prevented from doing so by others’ protectionism. And while protectionism may start off as “temporary,” companies that benefit have every incentive to find new reasons to maintain it. Just look at the EU’s Common Agricultural Policy, originally designed to prevent Europeans from starving; its lavish subsidies and high tariffs now keep out non-EU food. Protectionism obstructs the world economy’s ability to adjust, rather than encouraging it.
The way to break the destructive spiral is through coordinated fiscal and monetary action to boost global demand, and by nationalizing and restructuring the zombie banks dragging the economy down. Employment could be supported with big cuts in payroll taxes, along with aid to help workers retrain and find new jobs. Economic nationalism comes at the risk of turning this nasty recession into a depression. There is a better way.
Philippe Legrain is the author of Open World: The Truth About Globalization and Immigrants: Your Country Needs Them. His new book is about the future of globalization. Read more at www.philippelegrain.com.

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