Thread: Protectionist dominoes beginning to tumble across the world

Protectionist dominoes are beginning to tumble across the world

The riots have begun. Civil protest is breaking out in cities across Russia, China, and beyond.

By Ambrose Evans-Pritchard
Last Updated: 11:37AM GMT 21 Dec 2008

Comments 8

Greece has been in turmoil for 11 days. The mood seems to have turned "pre-insurrectionary" in parts of Athens - to borrow from the Marxist handbook.

This is a foretaste of what the world may face as the "crisis of capitalism" - another Marxist phase making a comeback - starts to turn two hundred million lives upside down.

We are advancing to the political stage of this global train wreck. Regimes are being tested. Those relying on perma-boom to mask a lack of democratic or ancestral legitimacy may try to gain time by the usual methods: trade barriers, saber-rattling, and barbed wire.

Dominique Strauss-Kahn, the head of the International Monetary Fund, is worried enough to ditch a half-century of IMF orthodoxy, calling for a fiscal boost worth 2pc of world GDP to "prevent global depression".

"If we are not able to do that, then social unrest may happen in many countries, including advanced economies. We are facing an unprecedented decline in output. All around the planet, the people have reacted with feelings going from surprise to anger, and from anger to fear," he said.

Russia has begun to shut down trade as it adjusts to the shock of Urals oil below $40 a barrel. It has imposed import tariffs of 30pc on cars, 15pc on farm kit, and 95pc on poultry (above quota levels). "It is possible during the financial crisis to support domestic producers by raising customs duties," said Premier Vladimir Putin.

Russia is not alone. India and Vietnam have imposed steel tariffs. Indonesia is resorting to special "licences" to choke off imports.

The Kremlin is alarmed by a 13pc fall in industrial output over the last five months. There have been street protests in Moscow, St Petersburg, Kaliningrad, Vladivostok and Barnaul. Police crushed "Dissent Marchers" holding copies of Russia's constitution above their heads in Moscow's Triumfalnaya Square.

"Russia has not seen anything like these nationwide protests before," said Boris Kagarlitsky from Moscow's Globalization Institute.

The Duma is widening the treason law to catch most forms of political dissent, and unwelcome forms of journalism. Jury trials for state crimes are to be abolished.

Yevgeny Kiseloyov at the Moscow Times said it feels eerily like December 1 1934 when Stalin unveiled his "Enemies of the People" law, kicking off the Great Terror.

The omens are not good in China either. Taxis are being bugged by state police. The great unknown is how Beijing will respond as its state-directed export strategy hits a brick wall, leaving exposed a vast eyesore of concrete and excess plant.

Exports fell 2.2pc in November. Toy, textile, footwear, and furniture plants are being closed across Guangdong, now the riot hub of South China. Some 40m Chinese workers are expected to lose their jobs. Party officials have warned of "mass-scale social turmoil".

The Politburo is giving mixed signals. We don't yet know how much of the country's plan to boost domestic demand through a $586bn stimulus package is real, and how much is a wish-list sent to party bosses in the hinterland without funding.

Shortly after President Hu Jintao said China is "losing competitive edge in the world market", we saw a move towards export subsidies for the steel industry and a dip in the yuan peg - even though China already has the world's biggest reserves ($2 trillion) and the biggest trade surplus ($40bn a month).

So is the Communist Party mulling a 1930s "beggar-thy-neighbour" strategy of devaluation to export its way out of trouble? Such raw mercantilism can only draw a sharp retort from Washington and Brussels in this climate.

"During a global slowdown, you can't have countries trying to take advantage of others by manipulating their currencies," said Frank Vargo from the US National Association of Manufacturers.

It is a view shared entirely by President-elect Barack Obama. "China must change its currency practices. Because it pegs its currency at an artificially low rate, China is running massive current account surpluses. This is not good for American firms and workers, not good for the world," he said in October. The new intake of radical Democrats on Capitol Hill will hold him to it.

There has been much talk lately of America's Smoot-Hawley Tariff Act, which set off the protectionist dominoes in 1930. It is usually invoked by free traders to make the wrong point. The relevant message of Smoot-Hawley is that America was then the big exporter, playing the China role. By resorting to tariffs, it set off retaliation, and was the biggest victim of its own folly.

Britain and the Dominions retreated into Imperial Preference. Other countries joined. This became the "growth bloc" of the 1930s, free from the deflation constraints of the Gold Standard. High tariffs stopped the stimulus leaking out.

It was a successful strategy - given the awful alternatives - and was the key reason why Britain's economy contracted by just 5pc during the Depression, against 15pc for France, and 30pc for the US.

Could we see such a closed "growth bloc" emerging now, this time led by the US, entailing a massive rupture of world's trading system? Perhaps.

This crisis has already brought us a monetary revolution as interest rates approach zero across the G10. It may overturn the "New World Order" as well, unless we move with great care in grim months ahead. This is where events turn dangerous.

The last great era of globalisation peaked just before 1914. You know the rest of the story.

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While this writer is ambivalent about the outcome of this mess that GWB has put us in (along with his predecessors), there is the fluffy idea that the great consumer nation can consume all the garbage that other countries are stuffing in here, sometimes slowly killing us the taxpayers, our children and pets.
Currency manipulation means that our corporations are feeling good about buying $10 million worth of stuff, when on the open market those goods would only mean a worth of $1 million were China to have a free-market float. Currency manipulation also means that China, buying US obligations, on which we pay good American taxpayer dollars in interest, is buying them for pennies by inflating the value of their currency and getting a huge return.
Of course there is a disaster as the consumer nation of the world has no money left to consume their products, while our products are too expensive to bring any "real" money into this country. While the Treasury prints and prints more money, there is very little basis to support the money because of our productivity slack that will guarantee payments to those countries that are buying Treasury obligations.

If China allowed the yuan to float one of the biggest beneficiaries would be Mexico which would see the combination of proximity and lower wages than the United States draw production from China. It would be even higher if the United States were to enforce its immigration law as many marginal manufacturing operations here employing them would set up or expand plants in Mexico to continue to employ them.

Got that en pointe, Richard! This faith-based free trade crap has already ruined so many jobs for Americans, both in and out of this country that the consumer nation of the world is no longer existing. Of course, we will see our factories and other businesses heading to Mexico for cheap labor since with the expensive price of fuel earlier, there was no reason to ship something across the world when it could simply have been trucked across our southern and northern borders for a lot cheaper. My prediction is that the yuan will never float in defense against our jobs not going overseas and shipping the product back versus putting a factory in Mexico which could be hauled over there in a truck or two without the fuel costs shipping to and from China. And it is also a lot cheaper to send the displaced workers to teach their substitutes in doing those jobs they will be losing.