G-20 Faith in Free Trade Remains Unbroken

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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.

So writes Noreena Hertz, economist and author, in her op-ed at Spiegel Online: “Is Protectionism Really All that Bad?”

Despite the nationalization of banks, calls for increased regulation, and massive trillion dollar deficits amassed, the status of free trade remains “basically sacrosanct”, she writes. “‘Free trade is good’ continues to be presented as a totemic truth, ring-fenced from debate or interrogation.”

An examination of the G-20 communiqué (pdf) from this week’s meeting seems to confirm Hertz’s assertion.

The G-20 leaders stated: “We believe that the only sure foundation for sustainable globalisation and rising prosperity for all is an open world economy based on market principles, effective regulation, and strong global institutions.”

They pledged to “strengthen financial regulation to rebuild trust” and “promote global trade and investment and reject protectionism” among other points.

The push toward increasing deregulation has been temporarily, at least, halted on paper. From the statement:

We will take action to build a stronger, more globally consistent, supervisory and regulatory framework for the future financial sector, which will support sustainable global growth and serve the needs of business and citizens…

Strengthened regulation and supervision must promote propriety, integrity and transparency; guard against risk across the financial system; dampen rather than amplify the financial and economic cycle; reduce reliance on inappropriately risky sources of financing; and discourage excessive risk-taking.

According to UK Prime Minister Gordon Brown, this marks the “death… of financial market liberalisation, privatisation and unfettered capitalism promulgated by the Bretton Woods institutions – the IMF and the World Bank.”

While stronger regulation may be forthcoming, the belief in free trade, however, remains unchanged. Hertz writes:

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 from the G-20 statement:

World trade growth has underpinned rising prosperity for half a century. But it is now falling for the first time in 25 years. Falling demand is exacerbated by growing protectionist pressures and a withdrawal of trade credit. Reinvigorating world trade and investment is essential for restoring global growth. We will not repeat the historic mistakes of protectionism of previous eras.

Hertz describes this as “scaremongering” and invoking the fear in the form of faint memories of the 1930s. She writes:

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.

Instead of challenging the belief that free trade will save the world’s economy, the G-20 leaders accepted this neo-liberal dogma and pledged “to refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation (WTO) inconsistent measures to stimulate exports” until 2010.

They promised that their countries would “not retreat into financial protectionism, particularly measures that constrain worldwide capital flows, especially to developing countries” and take, “at the same time, whatever steps we can to promote and facilitate trade and investment”.

The rhetoric coming from the meeting made it seem as if some of the G-20 leaders feared more about protectionism than loss of jobs from their country. So much so that they promised to have the WTO “‘name and shame’ countries that erected trade barriers, intended to resist growing protectionist sentiment.”

Hertz counters that protectionism, when selectively applied, can have a positive role in rebuilding a nation’s domestic economy.

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.

For economies actively destroying jobs at an accelerating rate, such as in the United States where the seasonal unadjusted jobless rate is at 16.2 percent, a protectionist envelope could cushion workers in the failing manufacturing sector while it reinvent itself or allow workers in the construction sector to retrain for new opportunities in a post-housing boom economy. Hertz suggests instead of embracing free trade without question, nations should be allow to erect short term protectionist measures to stop a cratering economy.

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.

The problem is while free trade is promoted by G-20 leaders and other neo-liberals as good for a nation’s economy, it has many negative impacts like the loss of domestic industries and once-dependable jobs. Likewise, protectionism is blamed for eliminating jobs when, in fact, it can save jobs long enough to allow for people to retrain or industries to retool. Hertz writes:

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.

I think the time has come to look a fresh and see if and how protectionism can be helpful to rebuilding domestic economies and creating jobs especially in a green economy focused on sustainability rather than on unbounded growth.

 

^{Cross-posted from European Tribune.}