Trade Obstacles Will Prolong the Economic Crisis

The threats are coming from, and would affect, all parts of the globe.

PETER D. SUTHERLAND | From today's Wall Street Journal Europe.

Are we already seeing the beginning of the kind of downward spiral in trade and cross-border investment that turned the 1930s into an economic and political catastrophe?

David Gothard

If so, the outlook is grim indeed, because the globalization of the past 20 years or so in particular has made all our livelihoods much more dependent on international trade and financial flows than in the past. A generation of splitting up and stretching supply chains around the world, of outsourcing and migration, and of cross-border direct investment and integration, mean that every person's living standard depends on what happens in other countries. This has been an astonishing force for growth and the reduction of global poverty for nearly 30 years. But it means the adverse impact of protectionism will be severe.

Consider that in 2006 a fifth of U.S. manufacturing jobs were generated by exports, directly or indirectly, according to the latest annual report of the U.S. Council of Economic Advisers. Workers in these jobs earn up to 18% more than people working for firms not engaged in exports. Other economies are much more dependent on trade than the U.S. is, so the threat to living standards from a slump in trade is enormous.

The threat is also imminent. The extent of the integration of most of the world's economies means 21st-century protectionism takes many forms, and we are starting to see a number of them. The U.S. House of Representatives attached "Buy America" provisions to the government stimulus package. The British government has persuaded oil company Total to give jobs to British workers in order to end wildcat strikes over the employment of Italians. Malaysia's government has instructed its firms to lay off foreign nationals first. Brazil's government has edged up tariffs on manufactured goods. Some commentators in the U.K. have welcomed devaluation as a useful tool in the policy armory. As Prof. Simon Evenett of the University of St. Gallen points out, there has been a dramatic increase in the discussion of protectionism in the world's media. This development reflects the trend in the policy debate.

The reason for this trend is clearly the slump in exports and cross-border investment during the past few months. No major exporting country has escaped a fall in export volumes since last September. Some of the major emerging economies, including Brazil and China, have seen a particularly steep decline, given their pivotal role in global supply chains for industries such as apparel and automobiles. The challenge for policy makers is to halt the downward spiral in demand rather than acting in protectionist ways which will accelerate it.

This is quite a challenge. The scale and complexity of globalization -- the sheer variety of flows of people, goods and investments across borders -- mean that it is no longer sufficient to simply prevent tariffs from rising or avoid competitive currency devaluations. Governments need to avoid the many other ways in which they can discriminate against foreign companies and foreign workers: Inward-investment regulations, state aid, tendering processes, employment laws, health and safety regulations, and instructions to bank managements about lending policies can all become protectionist tools.

It is all too easy to disguise protectionist measures, and all too tempting to engage in them given the political pressures from voters to safeguard their jobs and living standards. Many politicians continue to pay lip service to the importance of trade and open economies while advocating measures that will actually undermine the openness which is the only possible engine for restoring growth in the future.

Politicians are of course accountable to their voters. It would be foolish to ignore political imperatives. However, political leaders have a responsibility to act in the long-term interests of their populations rather than responding to every short-term demand with a quick fix. They also have an opportunity at the forthcoming G-20 summit in London to agree among themselves some principles which will help limit the spread of the virus of protectionism.

At a minimum there are three kinds of measures they must agree. One is support for international as well as domestic lending by banks, including trade credit. International trade and investment flows cannot be sustained without the financial infrastructure which supports them.

The second concerns exchange rates, whose movements have been too extreme and are a source of uncertainty extremely detrimental to trade flows. Over time we will need to see a gradual revaluation of the Chinese currency, as a reduced U.S. balance of payments deficit and reduced Chinese surplus will be needed to rebalance the global economy. Meanwhile, the G-7 and the G-20 should signal their determination to prevent further sharp currency moves.

Finally, and of overwhelming importance, our political leaders must live up to their rhetoric on the need to conclude the Doha Development Round successfully this year. There is little sign so far that any negotiators are taking this pledge seriously, but governments must deliver on it in the coming months. The successful conclusion of the multilateral trade round will be a significant test of leadership, both in its direct impact and in its symbolism. Particular responsibility rests with two countries: the United States and India.

I am not sure that the lessons of the 1930s have been absorbed by our political leaders. They have poured taxpayer money into bank bailouts, increased spending programs and encouraged central banks to slash interest rates and "print money." But there is no sign that they understand that all the nations of the world economy sink or swim together, and that history's verdict on their management of this crisis will depend on looking outward for our lifeboats.

Mr. Sutherland is chairman of BP and a former director-general of the General Agreement on Tariffs and Trade and the World Trade Organization.