Why Protectionism Could Intensify the Crisis
Tim Sprissler | Deutsche Bank Research | May 2009
The current economic
and financial crisis is often compared to the worldwide crisis of 1929. At the
time many countries reacted with increased tariffs and currency depreciation,
which resulted in severe international consequences. Today the danger that protectionist
measures could further intensify the crisis looms again. Subsidizing national
businesses has become increasingly popular, as many countries are taking local
enterprises firmly under the arm of the state. However, politicians and
political parties should not lose sight of the mid-term chances for economic
growth. The most important goal must remain securing open markets and free
trade. Currently, however, many countries are inclined to pass protectionist
measures that could take on many forms:
Increasing Tariffs: Russia, India and Turkey have already raised tariffs on certain products and have even forbidden the import of others. Admittedly, around 75% of world trade is located in customs union regions or free trade zones, where either tariffs are fixed or cannot be raised.
Non-Tariff Barriers: Direct non-tariff barriers could also be used to protect domestic producers. Among these are intensified import procedures, anti-dumping measures or discriminatory tax and certification protocol. Likewise, subsidies for the domestic industrial sector could be implemented, for example for the automobile industry or the agricultural sector. Other indirect measures like environmental protection regulations could hinder emerging markets above all, and thereby threaten the success of the upcoming climate conference in Copenhagen.
Currency Depreciation: In order to make exports cheaper countries can decrease the value of their currency. In the worst case scenario such action has a severe deflationary effect. Indeed, currency manipulations are not easily recognized from the outside. Another related danger lies in central banks becoming heavily involved in the foreign exchange market.
National Stimulus Packages: In order to ensure that the enormous amount of tax money accomplishes its purpose and counteracts the crisis, and especially makes national businesses profitable, political mechanisms could easily seize this chance to pass protectionist measures (for example, the US, whose stimulus package included a "buy American" clause). In order to avoid distorted competition and inefficiency, international coordination of national stimulus packages is necessary, one of the conclusions of the London summit. However, to date there are no detailed commitments to such a goal on the part of G20 countries.
Restricting Capital Flows: In addition to sinking trade figures, international capital flows have also been notably restricted. According to UNCTAD, foreign direct investment in 2008 decreased by 21%. In addition to the crisis, such a decrease in investment has been caused by politically motivated restrictions on capital flows, which breed insecurity among investors.
Limiting Migration: In times of crisis restrictions on immigration are reinforced. As a result, waves of immigrants are returning home to developing countries and emerging markets, which could considerably aggravate the recession. Furthermore, migration, through the re-allocation of labor, could have cushioned the impact of the crisis and acted as an engine for growth under the current circumstances.
This summary was prepared by the Atlantic Community editorial team from "Aus Erfahrung schlecht - Die Rückkehr des Protektionismus" published here by Deutsche Bank Research