Protectionism is poison for the global economy

The U.S. president believes leveraging trade barriers is an appropriate way of limiting the large deficit in the U.S. trade balance. Accordingly, he imposed tariffs on imported solar panels and washing machines a few days ago. In his speech on Friday at the World Economic Forum in Davos, he reaffirmed his “America first” strategy and said: “We cannot have free and open trade if some countries exploit the system at the expense of others.” Having said that, he then expressed his willingness for separately negotiated, bilateral trade agreements. Fortunately, this urge for isolationism is not shared by many global leaders. The past shows us very clearly that weak momentum in global trade often goes hand in hand with subdued economic growth.

However, we can learn even more from the past: since the financial crisis, global trade growth has lagged behind the momentum of the pre-crisis years. Up to 2007, growth rates were essentially between 5%–10%. From 2013 (i.e. after the marked fluctuations caused by the major financial and economic crisis) up to 2016, the trade volume experienced average yearly growth of a shoddy 2%.

It was only last year that international trade momentum began to pick up again noticeably. At long last, economic growth was soon able to move away from the low level of 3% at which it had been stranded for five years in a row! This most recent momentum in global trade is consequently also partly responsible for the expectation that the global economy will grow by around 4% this year for the first time in seven years. In the long-term average, global trade is still responsible for a third of global growth and last year the growth contribution was even greater.

For this reason, it is very reassuring that leaders of other countries, such as the Canadian Prime Minister Justin Trudeau, declare themselves strongly in favour of free world trade not only at Davos. Furthermore, Trudeau also announced that Canada had reached a new free trade agreement (TPP) with ten Asian countries in Tokyo. The participating countries not only agreed to abolish tariffs and trade restrictions over the next few years, but also formalised minimum requirements for environmental protection and employees’ rights.

A striking feature of the TPP agreement is that it also contains regulations for services and financial operations – something which comes as a real breath of fresh air! The USA is not included, since President Donald Trump abandoned the TPP a year ago in what was almost his first official act; at that time, the agreement was very near completion. CETA, which was agreed between the European Union and Canada last year as well, is not just a commitment to free global trade, it should also afford it fresh momentum.

However, the fact that the USA, the largest industrial country in the world, is set against any further progression of globalisation is of course very damaging. Retaliatory measures from any countries affected could quickly bring about a chain reaction and lead to a trade war. This would seriously compromise global economic developments.

 

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