Protectionism gets a new coat

It is a classic: During each recession — and this is my fifth — protectionism resurfaces.
After four years of economic turmoil, unemployment is critical in the United States (7.7 percent) and Europe (11.7 percent). Obviously governments want to protect national companies and jobs, especially if they want to be re-elected.
If protectionism is back, it is also far more subtle than in the past. Gone are the days when governments would apply tariff barriers (unacceptable to the World Trade Organisation) or impose crude measures such as targeting one “congested” small entry point for goods entering their country (as the French did to Japanese video players in the 1990s).
Today, protectionist measures thrive on pollution standards, health requirements, safety standards and so on. In addition, “buy national” campaigns or “forced co-operation” with local companies complete a wider array of measures available to scared administrations. The coat changes but the beast remains the same.
Let us speak about “economic nationalism”.
Many emerging economies have set as an objective the globalisation of their national champion companies. To that end, they can rely on large reserves of cash.
China now has some US$3.3 trillion of foreign currency reserves and Russia US$530 billion.
Considerable money is channelled to home companies through sovereign wealth funds: The Abu Dhabi Investment Authority manages US$624b, the State Administration of Foreign Exchange from China controls US$567b and the National Welfare Fund of Russia has US$149b.
“State-backed enterprises” are a new form of protectionism: It means funding national companies with government money to help them succeed abroad.
In China, 21 out of the 22 largest companies have close financial ties with the state. Meanwhile, the domestic market where these companies operate have become increasingly difficult to penetrate.
The explosion of global brands from emerging markets and their impact on world competitiveness have forced “advanced economies” to react.
Re-industrialisation has become the key word, and rightly so: In the past 20 years, the share of industry as percentage of gross domestic product has dropped from 16 percent to 11.2 percent in the US and from 17.7 per cent to 11.4 percent in the United Kingdom.
The share of world manufacturing of most industrialised nations, except for Germany, has dropped by 20 percent.
Re-shoring, that, is bringing back home some manufacturing capacity, is increasingly fashionable.
General Electric brings back some household appliances production from China to Louisville, Kentucky. Apple and Hewlett-Packard also plan to invest in manufacturing in the US.
The tension between “economic nationalism” in emerging economies and “re-industrialisation” in advanced economies will define world competitiveness in the coming years. Protectionism will be a tempting solution to these pressures.
Certain governments will even use the threat of nationalisation to achieve their objectives, like can be seen in the spat between French Minister Arnaud Montebourg and steelmaker Mittal, which acquired France’s Arcelor in 2006.
But in the end, most governments will be very careful: Protectionism is a double-edged sword that can be returned against its user — even with a new coat. – Today Online
* Stephane Garelli is a professor at the International Institute for Management Development and at the University of Lausanne, Switzerland.

May 2013
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