The Hindu Business Line : The danger of rising economic nationalism

If several countries retaliate by adopting their version of the US’ ‘Buy American’ stance, global trade volumes could spiral downward, turning the recession into a full-blown Depression. Such virulent nationalism needs to give way to globalisation for the benefit of mankind, says ALOK RAY.

As economies all over the world are going deeper into recession (or at least significant slowdown, as in China and India), economic nationalism is rearing its head everywhere.

The hardest hit have been some of the economies that rely more heavily on exports, such as Japan, Germany, Taiwan, South Korea and Singapore. Questions about the wisdom of export-led growth model are once again being raised by anti-globalisation forces. Some East European nations that recently joined the EU have been severely hit by shrinking trade, foreign investment and credit flows from Western Europe. Their demands for massive bailouts by the richer Western European members are putting the EU under severe strain, and making it difficult for it to maintain its solidarity.

The US Congress is pushing for the introduction of a “Buy American” clause in its stimulus plan that would require that the projects financed by stimulus money to use only American-made steel, construction materials and machinery. More restrictions on granting of H1-B work visa for foreign workers (which would affect Indian IT professionals most) are also being talked about.

Earlier, the US government committed $15 billion to help the troubled US auto-makers. In the UK, workers are staging massive rallies against the use of foreign workers in domestic construction projects. Spain is paying foreign workers lump-sum unemployment benefits to go back home and not return for at least three years.

Following the US lead, governments in the UK, France and Germany are also providing subsidies in different forms to their auto industries. Dubai is not renewing work permits for foreigners which is causing a crash in property and car prices there and would adversely affect remittance receipts for many countries.

Taxpayer money

Many European governments are pushing their bailed-out banks to lend money only to domestic borrowers. The Indian government, too, has raised import tariffs on some steel products. Anti-dumping duties are being used more liberally in many countries. Governments would justify their decisions by arguing that when tax-payer money is being used to fight recession and job loss, it should also be used to stimulate demand for home-produced goods. Otherwise, foreigners gain income and jobs at the cost of the domestic taxpayer.

Moreover, some economists in the US are arguing that this is not a “beggar-thy-neighbour” policy (which all economists are usually against) as the “Buy American” provision applies only to additional expenditure financed by stimulus money. So, the rest of the world is going to have some net increase in demand, despite the Buy American clause. According to this view, other countries are free to have their own stimulus packages to stimulate their economies, having their own version of ‘Buy American’ — they should not expect that American tax-payers would do it for them. The trouble with this argument is that the rest of the world may not see it this way. It is not the economist’s fine logic but what the people perceive to be the reality which counts in policy-making.

For example, Gregory Mankiw, the Chairman of the Council of Economic Advisors for some time during the Bush administration, was virtually forced to resign from the post for suggesting that the outsourcing of service jobs to countries such as India is like any other trade that benefits the US economy.

PROTECTIONIST moves

However much some economists may argue to the contrary, US labour believes that America’s job loss is primarily because of competition from cheap Chinese, Indian and Mexican labour. In the same way, both labour and business in the rest of the world may regard these American moves to be protectionist and would like to retaliate by restricting imports from the US.

As Professor Jagdish Bhagwati has rightly pointed out, there are many WTO-compatible ways by which tariffs can be raised. For example, the actual tariffs for many products in India are currently below the “bound” tariffs (maximum permissible under WTO rules). So, the Indian government may well be tempted by the American action to raise actual tariffs towards the “bound” rates without violating any WTO obligations. India can also switch its purchase of jet aircraft from Boeing to Airbus.

If a large number of countries do the same in “retaliation,” prompting others, (including the US Congress) to retaliate, the volume of trade (and jobs) for all of them would follow a downward spiral which may eventually turn the recession into another “Great” Depression. This is what happened in the 1930s Great Depression, following the protectionist lead taken by US by its passing of the infamous Smoot-Hawley tariff in 1930, despite an open petition by more than a thousand American economists against the Bill.

As Pascal Lamy, the head of the WTO, has put it: “Scapegoating the foreigner is an old trick in politics.” The problem is that all foreigners are the natives of some other countries who in turn would scapegoat their foreigners and so on in an ever-expanding circle.

Scapegoating foreigners

The US administration is also putting more pressure on the Chinese government to revalue its currency to help reduce the massive US trade deficit vis-À-vis China. Again, all economists are not sure about the possible effects of Chinese revaluation on US trade deficit. First, there is a big difference among respected trade economists in the US about the extent of revaluation of Chinese currency (against the dollar) needed to wipe out the current deficit.

Second, the US trade deficit is basically a reflection of US overspending. Unless that overspending issue is resolved, a revaluation of Chinese currency will mean that Chinese goods will become more expensive relative to goods from, say, Vietnam or Malaysia. So, Americans will buy more from Vietnam and Malaysia, increasing US trade deficit with those countries, without affecting the overall US trade deficit.

Some think that globalisation is irreversible. They have not studied their history books well. The earlier wave of globalisation following the invention of steam engine-powered trains and ships, the telegraph and telephones — and accompanied by massive expansion of international trade, capital flows and migration — basically came to an end at the start of the First World War because of political forces.

The current wave started only after the disastrous consequences of the Great Depression, and the Second World War convinced the political decision-makers that virulent nationalism (both political and economic) needs to give way to globalisation, again for the benefit of mankind.

So, there always exists the danger of political forces reversing economic globalisation, irrespective of the revolution in transportation, information and communications technologies.

(The author is a Visiting Professor, Portland State University, US. blfeedback@thehindu.co.in)

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