End 2012 – Neo-protectionism establishes itself as the new paradigm of world trade


- Excerpt GEAB N°57 (Sept. 16, 2011) -



End 2012 – Neo-protectionism establishes itself as the new paradigm of world trade
Analysis published in GEAB 4 months ago:

Because of the simultaneity of the global economy (1) relapsing into recession and key political events affecting the world’s major economies (2), we anticipate a sharp rise in protectionism from the end of 2012. In its initial phase, it will mainly take the form of various non-tariff barriers, more discreet than traditional customs duties, but it will, de facto, cause the most important change in the terms of world trade since the signing of the GATT (General Agreement on Tariffs and Trade, the WTO ’s predecessor) in 1947.

Neo-protectionism: A protectionism that won’t give its name and will assume a modern guise

Initially, these protectionist measures will attempt to formally abide by the various multilateral treaties and other WTO provisions (at least to buy time via contentious appeals with ad hoc bodies), because each player will continue in parallel to try and increase its exports. Indeed, export-oriented countries like Germany and China, as well as most emerging nations, won’t take the risk of encouraging their buyers to erect their own tariff barriers.

Exports: %GDP for various countries - Source: CIA Factbook
Exports: %GDP for various countries - Source: CIA Factbook
This trend will obviously privilege zones benefitting from free trade (trading blocs). The end of 2012 will, therefore, be a milestone in the emergence of trading blocs (Euroland-EU Russian, Turkish and Mediterranean strategic partners / China-Japan-ASEAN / Latin America / North America, ...) which can either be the pillars of a new global governance in economic and trade terms, or the foundation for future belligerents in a zero-sum global conflict over the next decade (3). Finally, other countries like the United States are committed to free trade agreements (4) (even if they are of little weight in the medium term) and are now too dependent on the rest of the world (5) to allow itself the benefit of very visible protectionist measures; if only because they are de-industrialized to such an extent that they cannot, in the medium term, compensate for imports. This is, moreover, one of the elements that explains the repeated failure of policies to boost US employment (6).

Protectionism will therefore take other forms (7). There is, in fact, a whole range of more subtle measures which we describe below. Moreover, following the crisis in 2008, calls by the G20 not to give in to protectionism have certainly paid off, but only for two years. Without a sign of improvement in the economy, an increase in protective measures has been a sensitive subject recently: many countries now have more or less visible measures of protection in force (and / or making the adoption of such measures easier as the European Union has done in recent months (8)).

The first of these, which will have a major impact, is currency exchange rates. It is of course not always chosen (9) but can be influenced. It is a powerful protectionist tool which allows the price of exports to be lowered and raise that of imports. For example, despite their talk of a "strong dollar", the United States adapts to a lower dollar, even encourage its fall (a QE2 side effect). China also benefits since its peg to the dollar allows it to keep an undervalued Yuan. Similarly, in the UK there is hardly a voice in favour of revaluing the pound ... Finally, without being too Machiavellian, our team has already stressed that the only good thing to come out of the media hysteria over the Greek question for Euroland leaders is, undoubtedly, to avoid what has happened to the Swiss franc (and which put Euroland on the lookout in 2008), namely a dangerous assessment for the real economy.

Export subsidies also benefit domestic products abroad. For example, one obviously thinks of European and American subsidies to farmers, but also in China on some products (10).

More subtle, limits on exports of commodities (raw materials, food) resemble protectionism: an increase in the price of the product on the international market by reducing supply, simultaneously with a lowering of the product’s price in the domestic market via widespread supply, giving a strong advantage to the national product domestically. Export limits are in vogue: recently Russia announced limits on its oil exports (11) and a cessation of grain exports (12), China on its oil (13) and rare earths (14) (95% of World production), etc…

There is still bias in the awarding of state contracts. The most significant recent case is the Airbus / Boeing "match" to supply the US Air Force tanker (15); in France, the request to Air France to buy Airbus and not Boeing planes (16); increasing the national preference share in state procurement in Algeria (17), Buy American Act (18), etc…

Finally, stringent environmental and health standards can disqualify some imports of lower quality, as well as discouraging administrative restrictions for the importation of products. There is no shortage of examples, be it restrictions on the marketing of GMCs by some European countries, raw milk cheeses in the United States, beef containing hormones (European Union), cars which pollute, etc..

Here we have it, the whole range of measures has been laid out and only asks to be expanded further.

The four factors that will make protectionism the new "paradigm" from the end of 2012

We can analyze the reasons for the rise in protectionism via four areas: the critics of the dominant free trade talks, the consequences of excessive public debt, the volatility of currency markets and the end of the dollar’s reign.

Criticism of free trade: Protectionism is no longer a taboo subject in the circles of power whilst it was impossible to mention it only two years ago; it has now become relatively common in the mainstream (19) press and on the internet (20). The debate invites himself in politics: in Euroland one thinks of a return to the discussions on the need for industrial policies, strategic sectors, ... (21); in the United States of the Tea Party movement; in Europe, the rise in strength of the extreme right especially those who advocate these ideas (22), etc… And public opinion is sensitive: the question, “are free trade agreements good for the United States?” A US survey in October 2010 gives 44% against versus 35% in favor (a big development: it was 32% and 43% respectively in November 2009) (23); in France, the result of a March 2011 (24) survey is given below:

French survey on protectionism - Source: IFOP, 16/06/2011
French survey on protectionism - Source: IFOP, 16/06/2011
We can identify two reasons for this criticism of free trade: first, the real or perceived responsibility of free trade in the crisis (or at least the failure of free trade to resolve the crisis) and secondly, by rising unemployment and inequality, despite neo-liberal promises (see charts below) and the deterioration of social conditions and of the environment.

End 2012 – Neo-protectionism establishes itself as the new paradigm of world trade

Progression of German inequality (Gini coefficient) and of the number of unemployed in the United States (1948-2011) - Sources: OCDE, BLS
Progression of German inequality (Gini coefficient) and of the number of unemployed in the United States (1948-2011) - Sources: OCDE, BLS
Finally, concern for protection of the environment (evidenced by the power of the Greens in Germany, for example) will push for the relocation of production, especially agriculture, and to higher environmental standards. We are thus witnessing a reassessment of the dominant ideology, illustrated for example by the disappearance of the WTO from the debate (see chart below) (25).

Ratio (standardized from 0 to 100) of Google searches for the word « WTO », 2004-2011 - Source: Google
Ratio (standardized from 0 to 100) of Google searches for the word « WTO », 2004-2011 - Source: Google
Public debt: This reassessment will weigh on the many changes of government in 2012 (especially in Euroland and the United States). Employment and industrial policy will be at the heart of debates with high unemployment rates everywhere: re-industrialization and protection of the labor market will be important themes. Europe prepares (26), in the United States, the opposition Democrats / Republicans (27) promise a good fight, the subject of relations with China will not fail to introduce itself (28). The excessive debt of all the developed countries should further add to protectionism for two reasons:

- a need to rebalance the accounts that will result in measures to preventing capital flight. Financial conditions no longer allow the practice of tax dumping, it will be necessary to protect oneself (so it will be a matter of fiscal protection)

- we are living in an era of "every man for himself" as shown in the competition between countries to capture global savings.

In fact, we have recently witnessed the adoption of legislation on the sly in Europe (29) and the United States (30) allowing the pursuit of a more protectionist policy.

Finally, the developed countries are realizing that the most modern production capacity is now in China, that the talk of "China manufactures basic goods and us advanced products" was a farce because China is already taking its first steps (even more) in aerospace, aviation, high-speed trains, computers, luxury cars, etc.. The theme of re-industrialization and, to execute it, protectionism, has a bright future ahead of it.

Currency market volatility: When movements in exchange rates between currencies are as large as they currently are, it is clear that having the same currency as one’s client provides a much more stable outlook (one knows in advance how much one will be paid) ... Yet trade infinitely prefers stability (is not price stability the objective of the ECB?). Thus, since currency turmoil is far from over, multinational companies (despite their initial reluctance) and trade in general will focus within the integrated economic zones, especially the Eurozone which has a common currency, the Asian zone where the Yuan is growing and the North-American zone in dollars (31).

Dollar reappraisal: The status of the dollar is being increasingly challenged and this process will accelerate because the United States is unable to reduce its debt (or even agree on the procedure) and to revive its economy. On the one hand, this should result in a 30% drop in the dollar against other major currencies (see previous GEAB issues) and, on the other hand, the use of other currencies to pay for more and more international trade (32).

The dollar’s devaluation will act as a "suffered protectionism" in favour of US exports. Will this devaluation allow the revival of US industry? The answer is negative for at least three reasons:

- as shown in the chart on exports, it plays a limited role in the economy, especially since a number of them do not meet the environmental or health standards of advanced countries (for example, vehicles which are not energy efficient and GMC agriculture or hormones)

- the dollar will still be too expensive relative to the Yuan or the Mexican peso: US products will still not be competitive enough

- oil prices, driven by consumption in emerging countries, will quickly regain or exceed current levels after declining due to the world economy’s relapse: with a weak dollar, it will weigh very heavily on the US economy (33).

Add to that the end of the dollar's status as an international reserve currency undermines the ability of the United States to freely to consume imported goods, as well as their ability to borrow. Therefore, the springs for growth must therefore be found internally. This country has always been able to handle economic patriotism; that will cause its leaders to adopt the protectionist measures seen above in an attempt to revive the economy.

What will the reaction of other countries? In the face of favoured US exports and fettered imports, they will soon adopt protectionist measures themselves. This should take place in late 2012 following the economy’s relapse and the political changes in 2012. However, it should be borne in mind that the generation of our leaders (even those arriving in 2012) is strongly influenced by free trade and will maintain the illusion of a rejection of protectionism in their speeches, especially just after the economy’s relapse.

The emergence of the era of neo-protectionism will, from 2013, accelerate the current geopolitical turmoil

Certain economic zones like the European Union and the United States are quite withdrawn in commercial terms: the sum of exports + imports represents only 16% of GDP for the EU and 17% for the USA (34). In addition, both areas are highly integrated with common currencies. They will, of course, be the major players in this development because they will be able to support it and want to impose it. The EU, however, will want to keep good relations with Russia (for gas and oil) and more generally with the BRICS, which will lead to "tailor-made" protectionism.

However, for the BRICS (which is a network and not an integrated region, much less a bloc), this development will undoubtedly result in strong internal tensions because they are not, at this stage, an area sufficiently linked to be able to adopt joint protectionist measures. They must accelerate the implementation of free trade treaties between them in a strategy of South-South (35) cooperation, but which can only, in the short / medium term, remain complementary to their trade with Europe on one side and the United States on the other. From 2012/2013, the interest of the BRICS will undoubtedly be, via the G20 or bi-multilateral summits (such as a Euro-BRICS summit (36)), to ensure it avoids a situation of inter- bloc conflict, and at least negotiate successful agreements with each of the two major integrated regions.

Progression of German exports to China (1999-2010) and German manufacturing investments overseas (2006-2009)  (%) - Source: Spiegel / Bundesbank, 07/2011
Progression of German exports to China (1999-2010) and German manufacturing investments overseas (2006-2009) (%) - Source: Spiegel / Bundesbank, 07/2011
Japan cannot stay out of China's sphere, whilst the United Kingdom will see its position become increasingly uncomfortable between the United States which withdraws to North America and a Euroland which integrates on the Continent.

Last but not least, in a world that is breaking up into integrated regions or blocs, there is an activity that quickly becomes secondary: that of a major global financial centre. Whilst on the contrary a demand for effective regional financial centers is rapidly emerging. Another piece of bad news for Wall Street and the City, foreshadowing the huge upcoming new layoffs in New York and London.

---------
Notes:

(1) The recent estimates of all the organizations monitoring the global economy all point in the same direction, namely strong downward revisions to growth estimates of just a few months ago for the second half of 2011 and 2012. The rebound of the Western financial crisis in an explosive context of uncontrolled public debt, Euroland slowly delivering its economic governance and complete political paralysis in the United States set against a backdrop of recessionary relapse ... create a really dramatic situation in terms of international trade. Sources: Le Monde, 09/12/2011; Financial Times, 09/01/2011; CNBC, 08/26/2011.

(2) Presidential and/or parliamentary elections in the United States, France, Spain, Italy, probably in Germany (see GEAB No. 49), Russia, and a change of political leadership in China.

(3) See the two scenarios 2010-2020 in Franck Biancheri’s book « The World Crisis – The path to the World Afterwards ".

(4) Especially NAFTA with Canada and Mexico: a third of their exports and a quarter of their imports.

(5) Especially China, through its US debt holdings and because it represents 19% of US imports. Beyond official pronouncements that minimize the US deficit vis-à-vis China (since, at $ 270 billion, it represents only 2% of GDP), one can indulge in a little rough calculation: the average income of the 50 million poorest households (almost half of households) is about $20,000 / year. If we deduct housing expenses (including rent or loan), food, transportation and health, we can conclude that there is less than $ 8 000 per year of spending per household, $400 billion for these 50 million households, compared with $360 billion of imports from China (which must be at least $500 billion for the US margins with retailers margins and various taxes). In other words, half of U.S. households depend on these imports. By way of illustration, one-third of Americans shop at Walmart (a discount supermarket) where over 70% of manufactured goods come from China. Source: China Daily, 11/29/2004 and Wikipedia

(6) And it's not President Obama’s recent proposal which will change anything because it doesn’t address any structural issue and it will in any case reduced to next to nothing in the context of a quasi-civil war between US political institutions.

(7) However, it can’t be excluded that customs duties reappear in the medium term (2 or 3 years) because it is the logical consequence of an increase in more "discreet" protectionist measures leading to a weakening in free-trade talks and a shift in ideology.

(8) Source: Sidley Austin, 02/28/2011

(9) One cannot really talk of protectionism if there is an unwanted fall in the exchange rate.

(10) Paper, for example. Source: ChineObservateurs.com, 05/15/2011

(11) Source: Les Échos, 05/03/2011

(12) From 08/15/2010 to 07/01/2011. Source: Le Monde, 08/15/2010

(13) Source: Le Figaro, 05/13/2011

(14) Source: New-York Times, 10/19/2010

(15) See, for example Le Point, 02/25/2011

(16) Source: Le Point, 06/12/2011

(17) Source: allAfrica.com, 07/19/2010

(18) See Wikipedia

(19) For example: ten or so articles in Le Monde since June (« It will be necessary to return to certain forms of protectionism »), Paul Krugman in the New York Times dated 01/06/2009 criticizes free-trade, etc.

(20) For example the new site Pour un protectionnisme européen, in Germany www.protektionismus.de, in the US sites for finding « made in the US » (for example. howtobuyamerican.com, etc.

(21) Caricaturally French, these issues are now beginning to gain credence in Brussels or in discussions on Euroland governance.

(22) The extreme left defends them as well, but in Europe it has more influence in intellectual circles than in public opinion

(23) Source: The Economist, 11/10/2010.

(24) See La Tribune, 17/06/2011; the French Institute for Public Opinion, 06/16/2011

(25) An omnipresent figure in international talks just four years ago, the WTO has in fact become literally "invisible". Just as LEAP had anticipated more than three years ago, the future of the perennial "Doha Round" is now behind it: either the WTO restructures itself on the basis of large integrated regions and takes into account the new, rapidly emerging, eco-social constraints, or it will become an obsolete institution before the middle of this decade.

(26) «Brussels wants to cut down on the system of widespread preferences ». Source: La Tribune, 05/11/2011

(27) As we saw in August, on the subject of raising the debt ceiling.

(28) See, for example, the Washington Post, 08/31/2011.

(29) See note 8

(30) Reinforcement of the US anti-dumping arsenal. Sources: Reuters, 08/262010; commerce.gov, 08/26/2010

(31) The current financial crisis, moreover, only accelerates the progression of Euroland banks (who have difficulties in obtaining Dollars to fund their international operations) towards an almost complete exit from the US Dollar to convert themselves to lenders in Euros. Our team believes that this development will have substantially begun in late 2012 creating de facto a new division of the "financial planet".

(32) See, for example the negotiations between China and Iran over oil, source: Business Insider, 25/07/2011.

(33) We saw protectionist measures followed the 1979 oil shock, cf Wikipedia.

(34) Source: Economy of the European Union and Economy of the United States, Wikipedia

(35) See, for example, the discussion « Africa can bring more than minerals to South-South trade, IPS, 07/13/2011.

(36) The above chart showing German exports shows it’s in Euroland’s interest to keep on good terms with China and the BRICS in general, even if the overall context changes. See the LEAP/E2020 summary note on this subject. Source: Europe2020, 06/28/2011

Lundi 23 Janvier 2012
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