Day By Day

Wednesday, December 26, 2007

The Neomercantilist Threat to Global Prosperity

Over the course of the past few decades the United States as well as the rest of the world has benefited enormously from free trade policies. Never in the history of the world have so many people, both in absolute numbers and as a percentage of the total population, enjoyed so much prosperity. And, most importantly, economic advances have not been confined exclusively to one region of the globe nor to elites -- they have benefited all levels of society.

Niall Ferguson last year noted this fact and it's ancillary phenomena -- peace and democracy.

Democracy is on a roll. There have never been so many democracies in the world. More than half the world's people now enjoy at least some measure of political representation.

Peace, too, is breaking out all over. The amount of armed conflict is lower than it has been at any time since the end of the Cold War. What is more, the world economy is going great guns. For the first time since 1969, there isn't a single major economy around the world that is in recession. On average, growth rates are above 4 per cent. Stock markets are up in both developed and emerging markets. Inflation is low, despite the recent hike in energy prices. There has been some monetary tightening lately, yet interest rates are still at historically low levels.

By the standards of my lifetime - the past 42 years - this is surely about as good as it gets.
Read it here.

But how long can the good times roll? Ferguson noted the protectionist sentiment characterizing today's political Left and worried that it might bring the free trade regime, along with all its myriad benefits, crashing down.

Ferguson was right to be worried. Robert Samuelson points to the emergence and growing strength of "neomercantilism", a form of economic nationalism that is hostile to free trade. He writes:

Here's today quiz. What do the following have in common: (a) Vladimir Putin; (b) China's currency, the renminbi; (c) the U.S.-Peru trade agreement; and (d) Hugo Ch¿vez? Answer: They all reflect the "new mercantilism."

It's an ominous development affecting the world economy. Even as countries become more economically interdependent, they're also growing more nationalistic. They're adopting policies intended to advance their own economic and political interests at other countries' expense.

The paradox is that as the Internet and multinational companies strengthen globalization, its political foundations are weakening. Of course, opposition is not new. Even if free trade benefits most countries, some firms and workers lose from added competition. But for most of the postwar era, a pro-trade consensus neutralized this opposition. That consensus is now fraying.
The world economic order depends on a shared sense that most nations benefit. The more some countries pursue narrow advantage, the more others will follow suit. "What's the glue that holds all this together?" asks Frieden. "Is there a common agreement about cooperation that allows governments to give up something to maintain the international order?" It's an open question whether these conflicting forces -- growing economic interdependence and rising nationalism -- can coexist uneasily or are on a collision course.
Read it here.

Like Ferguson and Samuelson I worry that the free-trade regime is tottering. Neo-mercantilism is just one aspect of the general reaction against globalization emanating from both the political Left and the Right. The obvious villain here is China, but it is not alone. Note the protectionist stance taken by the political left in the EU and here in the US. Note the rise of nativist sentiment on the Right. Note the disgust and dismay that accompanies popular discussion of "globalization" in the more fetid precincts of the news media [yes, I'm talkin' bout you Lou Dobbs]. The warning signs are all around us. Protectionist sentiment is on the rise and it it a palpable threat not only to the free trade regime, but to all the good that it has brought to the people of the world.

I fear a hard rain is gonna fall, and soon. Remember what happened when the last free-trade regime collapsed in 1914.