« January 2009 | Main | March 2009 »

February 19, 2009

Protectionism and recession

Protectionism has been for a number of years a dirty word. It is now a term that seems to be creeping back into fashion. This tendency is politically understandable in an economic downturn as international trade can be easily represented as putting domestic jobs at risk. International trade is and always has been a domestic political issue, especially in a country such as the United States where protectionism has a long history. Trade involves exports as well as imports and anything that diminishes imports is likely to rebound on exports both as a result of other countries’ policy and also as a result of further downturns in international income levels leading also to a reduced demand for exports. There are forces working for and forces working against the growth of protectionism. Who is saying what and to whom?

The recession has ruffled the feathers of governments all over the world. In an economic crisis there is an almost automatic tendency to look after one’s own. It seems easy to put in a clause, as has happened in the United States, that a stimulus package should, as if is being financed domestically, restrict its direct benefits to domestic industry and businesses. This is politically appealing and, alas, also short-sighted if the principle aims of the stimulus package are to reduce the depth and the duration of a recession. The “Buy American” provision in the stimulus package in the United States has been watered down. The statement about buy American has been matched with a statement about making sure that international trade agreements are also honored. Europe, in the form of the EU, made it clear that it wished to avoid a trade war, an almost inevitable outcome of restrictive measures unilaterally imposed. The package now tries to match domestic actions to international expectations but nonetheless gives a lot of scope for domestic preferential treatment at fairly significant levels. The EU led the international lobbying against the ‘Buy America” clause. Other countries too were concerned about any contraction in world trade that might come about as a result of the protectionist drift in the United States. China was alarmed and given the Sino-US economy it is easy to see why. China is not however an entirely open-door economy. Canada has also been alarmed at the protectionist tone though Obama seems to have reassured the Canadian Prime Minster that NAFTA is safe.

Whilst the EU Commission is trying to ensure no increases in protectionism internationally, there are internal EU problems of a protectionist nature that are threatening the integrity of the common market. In the UK workers have protested against the employment of “foreign workers” (EU citizens working in the UK). It is the case that UK citizens working in the rest of Europe fall just short of the number of EU citizens from the rest of Europe in the UK. The situation with respect to the generation of incomes is complex. It is too easy to blame others for rising domestic unemployment. The President of France has set off an embarrassing row within Europe by developing a stimulus package for the French economy that asks recipients of state aid such as the car industry to protect jobs in France. This means, under falling market conditions, contracting production in other EU countries such as the Czech Republic. This has upset the Czechs. With this and other market developments, Eastern Europe is now suddenly seen as at risk.

Stimulus packages in individual countries, such as France, will work to some extent through the re-generation of state infrastructure. The EU must stick to the principle that such projects are open to EU-wide competition. Protectionism is an attempt to “export unemployment” but it damages export sectors both domestically and internationally, leads to the persistence of economic problems and further misallocation of resources. The same is true for the United States, and all other governments for that matter. Governments need to be very clear headed, even-handed and capable of taking a long-term view if they are to avoid making the economic situation worse. Leadership at times like these is at a premium.

February 9, 2009

Gordon Brown, Sarkozy and the economic crisis.

The entente cordial is in trouble once more. The President of France in a well-publicized and lengthy television interview publically criticized British Prime Minister, Gordon Brown, and his economic policy towards the recession. Downing Street was not much amused by the statements made though they were made in the context of Sarkozy defending his approach to the recession and the development of French government policy. Sarkozy is intent on boosting state infrastructure rather than manipulating demand directly. Brown, who is on the political slide again, was irritated and Sarkozy’s own performance was seen to be weak and incoherent. Sarkozy’s broadcast was an attempt to gain back some popular support and to reassure the French that his government was actively pursuing the right policy for France. There was none the less a certain amount of diplomatic activity to smooth down ruffled feathers in London as Sarkozy vowed to avoid British government mistakes. Is there anything in this that needs reflecting upon?

France and the UK have different approaches to economic life, not just in the recent past. France has in essence a state directed approach to economic life (even if Sarkozy has set out to modify this before the current recession) and the UK has had a more flexible approach. Sarkozy currently is hankering after protecitonist thinking capable of putting France and French manufacturing first. The UK’s model for economic life has been not the United States as a whole but perhaps more the Californian economy, known for its flexibility and innovation and an economy in which British investment is high. The UK has benefitted from this flexibility but how the UK economy works is often misunderstood in the rest of Europe. True, financial services and services in general are of huge significant to the UK’s standard of living and the recent problems (which originated in the United States) mean that the UK is suffering sharply, especially in the financial sector. Sarkozy insisted that the crisis was caused by the “Anglo-Saxons? (a curiously old-fashioned reference to the United States and the United Kingdom, but one that has a degree of popular appeal in France) and made significant swipes at the Americans, stating, more or less that the United States should be responsible for its own debt. In some ways the attack was more pointedly against the United States. Brown is very aware of the need top avoid the retreat of banking into lending defined mainly by national boundaries and for continued international cooperation. London needs international financial markets to operate.

But the UK economy is not the “post-industrial economy? that many Europeans and Sarkozy seem to imply. Apart from the problems in the banking sector, failure in the current economic climate is located mainly on the demand-side of the economy. The big problems are on the High Street or are directly consumer-credit related. The UK is not a “post-industrial society? in any dramatic sense and manufacturing still has its part, and a significant part, to play in national economic life. Brown’s tax cut is certainly not dramatic and there are those in the UK who would argue, as Sarkozy has done, that the approach will not get anywhere. Nonetheless, reducing tax on purchases, keeping the interest rates low and the falling exchange rate will help the UK economy. The country is experiencing both recessionary pressure and a tug towards growth and recovery. The UK could argue that quick in/quick out will be the growth pattern and that the Euro-zone is yet to experience the full impact of its economic problems.
Sarkozy is faced with the need to stabilize the economy and to pursue his program of reform essential to change the economic balance in France. In trying to do both, he is choosing for himself a very hard road. The whole capitalist system world-wide has taken a turn towards “state capitalism? hitherto seen as the preserve of Russian and China and certain developmental economies in South Asia. This may be only a temporary phenomenon though the phenomenon may continue even after the present need has passed, in which case Sarkozy may need to fight a different battle.

Both Brown and Sarkozy are in significant political difficulties. Brown’s image recovered when he seemed to be taking an international lead in the development of policy towards the ailing financial sector. Sarkozy is attempting to fight off the prospects of further action in the streets against his government’s policies. Leaders in Parliamentary democracies are very vulnerable (as has already been witnessed in Iceland) during times of economic crisis. This is how such systems and their associated politics work. We must expect some further thrashing around though such swiping from one head of government to another is probably best avoided.