OCTOBER 5, 2016
Warnings that the global economy is about to sink into a morass of protectionism have been a staple for years. First, the September 11 attacks were predicted to throw sand in the wheels of globalisation. Then the global financial crisis was going to provoke governments to re-erect the trade barriers of the 1930s. And when the world somehow survived those, resentment at the rise of China would ensure that global economic policy descended into a destructive game of competitive currency devaluation.
None of those risks materialised. But as the expansion of world trade has slowed over the past few years, familiar warnings about the political risks to growth have re-emerged.
There can be little doubt that in western Europe and the US, economic populism, incorporating a rejection of globalisation, has been on the rise. But unless Donald Trump is elected as US president in a month’s time, in which case all bets are off, there is not much evidence that the world economy is about to be fractured by the widespread re-emergence of trade barriers.
The International Monetary Fund warned this week that political risk was one of the biggest threats to the world economy, though without mentioning Mr Trump and his protectionist threats by name. But, to its credit, the fund has also recently accepted that, although global trade growth has been weak, there is not much sign that protectionism is to blame.
In the two decades before the global financial crisis, trade grew about twice the speed of world gross domestic product; since 2012, it has only just kept pace. But the IMF found that around three-quarters of the recent slowdown simply reflected weaker economic growth overall, particularly in investment. Another chunk has most likely been caused by changes in supply chains. Nations like China, whose economies have become more sophisticated, now undertake multiple stages of production in-country rather than simply being a final assembly point for components manufactured abroad.
Naturally, the fund gives its regulation warning of the danger that trade barriers may restrain commerce. But despite the documented rise of “murky protectionism”, or blocks on trade implemented insidiously through regulations rather than tariffs, such measures seem to have had little effect.
This could undoubtedly change if the populists come to power in the US and Europe, assuming they are serious about what they say. The kind of wholesale import tariffs canvassed by Mr Trump would kick off a trade war, while the desire by the likes of France’s Marine Le Pen to tear up the EU single market would cause profound damage to Europe’s economy and the wider trading system. The UK’s Brexit referendum result in June has already unleashed calls for protectionism and interventionism from those who regard the EU as a constraint on government regulation rather than an excessive example of it.
But unless and until these political risks materialise, there is no need to panic about trade, and the best way of keeping it expanding is simply to encourage overall economic growth.
For the moment, the responsibility for supporting globalisation rests with central bank governors and finance ministers rather than trade officials. Monetary policy should err heavily on the side of easing, and those countries with fiscal space should use it. Beyond that, the state of trade and globalisation requires watchful vigilance, not alarm. Repeated warnings that the world is about to slide back into a protectionist nightmare have been proved wrong. They may well be again.