By Peter G Hall, Vice-President and Chief Economist
Say it isn’t so! We’ve heard the dreaded ‘P’ word enough in the past to be beyond this. Globalization has long since proven its worth, opening up new markets, and bringing efficiencies that make everyone better off. It’s why political leaders have made huge investments in trade deals, investment protection agreements, double taxation treaties and endless discussions to safeguard what has been put into place. Then, one or two things go wrong, and we lose it: globalization comes under attack as the obvious villain, and we retreat into protectionism, or at least into its vile rhetoric. Is it happening all over again?
Our last big bout wasn’t so long ago. Enter the Great Recession and with it, widespread amnesia. Globalization, which fueled the longest growth cycle in recent memory was now fingered for igniting the late-cycle excesses. One by one, countries came out with ‘me first’ policies that baldly displayed their ignorance – deliberate, or accidental – of how the systems of globalization really work. Some of globalization’s greatest beneficiaries became its sworn enemies. Buy American was our top customer’s plan. Then ‘France first’. China, of all places, was also trying to ring-fence activity within its borders.
What’s the appeal of such counter-intuitive policy? First, when the chips are down, it looks patriotic. Leaders who make bold statements about protecting growth appear to be champions of the cause. It’s popular, and it wins votes. Second, it plays on fears. Chaos increases desperation, which suddenly makes protectionism sound good. Third, it’s a remedy for the worry – usually unfounded – that some other country is unfairly hollowing out activity on the home front. Fourth, following the recession countries were spending hefty sums on stimulus, and they wanted to ensure – through protectionism – that nothing spilled abroad. Fifth, it’s always more convenient to blame your woes on outsiders; protectionism ‘fixes’ the ‘enemy without’. Sixth, it’s a nasty contagion: if everyone else is resorting to protectionism, well, we have to as well. Finally, frustration. After seven years of economic meandering, those left behind economically are eager for change. That’s why political messages today are replete with fortress-mentality shock-talk. Is there a reasonable end-game?
Business realities suggest that the crowing will crumble. Costs to the economy are significant, and they are more immediate than they used to be. Reprisals to protectionist measures can rapidly result in domestic layoffs that reveal the policies’ short-sightedness. Small wonder that some of the post-recession’s most prominent announcements were modified shortly after the press conference. It was quickly obvious that instead of ameliorating conditions, they actually stood to exacerbate them.
Today’s version of protectionist rhetoric is playing to the frustrations of a generation left behind, and is occurring in the context of troubling financial turbulence, significant weakening of BRICS economies and others affected by plunging commodity prices, and the deep structural weaknesses brought on by the Great Recession. Unfortunately, but typically, it has taken its eyes off longer-term gains. The goldmine of potential in the powerhouses of China, India, Brazil, Mexico, Indonesia and others strongly suggests broadening the reach of globalization, and investing in making it more efficient. The opportunity cost of ill-conceived short-term remedies is arguably incalculable.
Given the heightened role that today’s circumstances are giving to sentiment, persuasion has perhaps never been more important. For globalization to work, it’s an all-in process. But maybe there’s another way. There’s likely no better demonstration than a business strategy that sees these longer-term benefits, and through prudent execution, delivers the results. There’s more: there’s actually a huge possibility of gain through exploiting the open business channels that another’s protectionism gives rise to. If other economies are running away from globalization’s realities, there’s a larger opening for the ones intent on embracing them.
The bottom line? We can all hope that reason prevails ahead of concrete decisions being made that could prove very damaging to world growth. In the meantime, we can look for opportunities where others are building walls.
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