Protectionism is on the rise again, raising questions about the future of globalisation and of countries that rely on trade to earn a living. What happens next?
Protectionism is always in the air, espoused by those either with a limited appreciation for the benefits of trade or whose economic activities cannot stand up to the rigors of international competition. Usually, though, protectionism runs rampant during periods of weak economic growth and rising unemployment, not when the economy is as strong as it appears to be now.
That makes recent developments more worrisome. Protectionism appears to be motivated in part by large trade deficits with China. Ironically, reportedly more than 60% of China’s exports come not from Chinese companies but from multinational companies operating in China. This reflects the increasing use of China as a key supplier in the global supply chains of multinational companies. In such supply chains, trade is often triangular the multinational company produces components in its subsidiary in China, ships them to another facility, often in their home country, incorporates them in the final product, and then ships that product around the world.
Two observations come from this sketch of a global supply chain. First, the bilateral trade statistics between another economy and China simply do not tell the whole story. Second, the arrangement quite often produces a trade deficit between China and the major economy but a trade deficit that is of the multinational company’s own design, and is internal to the company. Such trade deficits are sustainable by construction, and are merely symptoms of globalisation.
It is estimated that between half and two-thirds of the U.S. trade deficit today is of this type. It is highly ironic that it would be this symptom of globalisation by companies from such major economies as the U.S. and Europe that would prompt their governments to consider protectionist measures. It is doubly ironic that those measures would probably harm the major countries’ multinationals the most, and put the sustainability of jobs in those economies at risk as a result.
Nevertheless, the economic benefits of globalisation in terms of enhanced productivity and purchasing power are sufficient that companies will probably continue to globalise despite attempts to stop them. Certainly, companies have overlooked trade barriers in the past. Consider the countries that have enjoyed the most international trade growth in the last five years: Vietnam, China, Russia and India. These same four countries are perceived to have the greatest visible (tariffs) and invisible (red tape, intellectual property risk and so on) trade barriers, according to a 2005 survey by the World Economic Forum. India has the highest average tariff rate at 29.1%, Vietnam is at 16.8%, Russia is at 9.9% and China is at 10.4%. It is worth noting, though, that China’s average tariff rate has declined significantly since its accession to the WTO in 2001.
The bottom line? Globalisation is to economists what gravity is to physicists an irresistible force. One can defy gravity temporarily, at high cost. Likewise, attempting to stop globalisation will come at a high cost potentially a trip down memory lane, to the living standards of 20-30 years ago.
By Stephen S. Poloz, is Senior Vice-President, Corporate Affairs and Chief Economist, Export Development Canada. His column on trade-related issues appears weekly on www.ctl.ca.