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Gloomy Portents for Global Trade

Author: Lee Hudson Teslik
January 30, 2009

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Davos was different this year. Amidst the worst economic crisis in decades, the World Economic Forum's annual mega-summit in the Swiss Alps found itself at a crossroads. The Financial Times' John Gapper says the prototypal "Davos Man"--the international captain of finance whose prominence and significance has risen meteorically in recent decades--seemed humbled. Many of the financial sector's major players skipped the summit altogether (Bloomberg), and several big banks cancelled the glitzy parties they have traditionally hosted at the summit. The concern for policymakers, however, isn't the subdued party scene. Rather, economists fear this year's Davos gloom could foreshadow a broader shift away from the interconnected economic model the World Economic Forum has traditionally embraced.

Pleas for economic openness rang out at this year's summit, particularly among the leaders of emerging economies. Russian Prime Minister Vladimir Putin warned against reliance upon intervention and protectionism to cure economic ills, saying such policies could backfire (Guardian). Chinese Premier Wen Jiabao backed Putin, saying world leaders must remain vigilant (Xinhua) in their efforts to curb trade protectionism. Egypt's trade minister echoed concerns (Reuters) about protectionism, as did India's (Reuters). "We will only make the crisis worse if we succumb to the lure of protectionism and petty nationalism," added Angel Gurria, the secretary-general of the Organization for Economic Cooperation and Development, in an article published on the OECD's website.

Significant threats loomed for free-trade hawks well before Davos. In a recent op-ed, CFR's Jagdish Bhagwati questioned U.S. President Barack Obama's pronouncements on trade, saying Obama has ignored lessons from the Depression era. Obama aside, the short-term trade outlook isn't particularly rosy. The International Monetary Fund estimates global trade will contract 2.8 percent in 2009 (WSJ), compared to an expansion of 4.1 percent in 2008. The World Bank also projects a contraction--the first decline in global trade since 1982. Trade policy could emerge as a flashpoint in the weeks and months to come, particularly as major developed economies seek to implement stimulus packages to boost their domestic economies. U.S. Democrats are pushing for "Buy American" provisions to be included in President Barack Obama's proposed stimulus package. British policymakers have come under fire (The Times) from the head of the World Trade Organization for a bailout package aimed at stabilizing British automakers, valued around $3.3 billion. French leaders, too, face strong protectionist pressures, particularly following recent strikes (Bloomberg) calling for President Nicolas Sarkozy to alter his stance toward the economic crisis in order to prevent French job losses.

Such movements may entice populist support, but economists in the industrialized world generally view protectionist trade policies as economically counterproductive. Experts have published any number of spirited defenses of globalization, including Bhagwati's book of the same name. Free capital flows across markets must continue, economists argue, in order to encourage division of labor and make the global economy more efficient and more productive. The Economist, summing up this view, argued in a recent analysis that protectionism is "individually appealing" but "collectively futile." Other analysts point out that disruptive trade policies like tariffs and subsidies could disproportionately hurt the developing world. South Africa's finance minister made this case (BBC) at Davos, saying African countries could risk economic "derailment" if they are cut off by trade partners. Former UN Secretary-General Kofi Annan captured the gravest concern (Reuters) in an open letter to the leaders at last November's G-20 summit: " If hundreds of millions of people lose their livelihoods and their hopes for the future are dashed," Annan wrote, "the human crisis will not remain just economic."

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