The worst economic crisis since the Great Depression - that is what economists and policymakers are calling the global financial downturn. Leading up to the Great Depression, the world reaped the benefits of an unprecedented era of economic openness, only to give up much of the gains as economies shut each other out during the 1930s. Though trade flourished again after the Second World War, some say we could be at the end of the second era of globalisation.
"I would buy into the argument that this era of free global capital flows may be over or coming to a substantial slowdown," said Mushtaq Khan, an economist at Citigroup. If advanced economies start raising barriers to imports in the hope that shutting out international competition will help them recover faster, the world's smaller economies may suffer serious setbacks, economists say. Dubai would be particularly vulnerable, since it has grown increasingly reliant on the steady flow of international trade through its ports, according to MR Raghu, the head of research at Markaz in Kuwait.
The US Treasury secretary Henry Paulson recently addressed the growing worries that the UAE's "outward-oriented" trade policies may make it vulnerable to an international trade lockdown. "As economies change, uncertainty can create resistance to openness," he told the Oxford Business Group. "Some worry about growing protectionist sentiment in the US. "It is critical to understand, however, that in the long run openness to trade and investment will not only bring prosperity, but will also improve stability by better enabling economies to manage external shocks and smooth out business cycles."
But not everyone is so sure. The US Democratic presidential candidate Barack Obama - who leads in nearly all of the national polls approaching tomorrow's election - has repeatedly argued against the North American Free Trade Agreement (Nafta) and decried the "outsourcing" of US jobs. Growing protectionism was listed as one of the main reasons why nearly half of China's toy exporters closed during the first seven months of this year, according to a Chinese customs bureau report quoted by Xinhua News.
The fears of protectionism caused by the global economic turmoil are particularly acute in countries which have a strong stake in the re-export business, where materials pass through a country's port without undergoing any modification. Dubai is the world's third-largest re-exporter, following Singapore and Hong Kong, according to Global Sources, a company that matches buyers and sellers of Chinese goods. The re-export business alone comprises one third of trade in the UAE, and provides a substantial amount of Dubai's income. The creation of economic free zones - particularly the Jebel Ali Free Zone - has served Dubai particularly well, allowing it to quickly become one of the world's top trading hubs.
From 2006 to last year, Dubai's total non-oil foreign trade grew by 30 per cent, from Dh523.5 billion (US$142.51bn) to reach Dh678bn, according to Dubai World's statistics department. Economists note that Dubai's economy is also reliant on oil exports, which have become significantly less profitable since the price of oil fell to below US$70 a barrel in recent weeks amid fears that a protracted global slowdown could hit demand. After watching oil prices fall to less than half their July high, economists warn that further declines are not impossible - noting that the price of oil was just US$40 a barrel less than four years ago.
"Dubai will be getting squeezed on both sides," Mr Khan said. "The regional oil surplus has been one of its big drivers." Weak oil prices could also precipitate a slowdown in Dubai's financial and property sectors, both of which are cornerstones of the emirate's economy, he said. William Cohen, former US secretary of defense, expects the financial slowdown to send the world into a "period of retrenchment" during which confidence in free market systems fades. "We've seen this engine fuelling so much wealth, and so many people have been lifted out of poverty as a result of it. Our problem is that we've got to wait for the fundamentals, there is no oversight," he said. "It is going to hurt the emerging economies much harder."
Recently, the World Trade Organisation (WTO) set up a task force to analyse the potentially devastating effects the situation could have on developing countries. One of the main concerns is that the credit shortage could affect trade finance, or loans created to facilitate large cross-border transactions. "The primary role of the WTO at this moment is to serve as an insurance policy against protectionism; especially for developing countries, whose expansion relies very much on trade," said Pascal Lamy, the director-general of the WTO, in an interview with the China Daily newspaper.
The WTO move comes only months after the most recent round of trade talks collapsed in Geneva this summer, with disagreements between the US and India over how developing nations could raise farm tariffs if imports increase suddenly. The most recent round of talks - called the Doha Round because they began in Doha, Qatar, in 2001 - have all but failed, commentators say. Even Mr Lamy concedes that the crisis poses a significant obstacle for the talks. The talks "will not be concluded this year" he said in a speech in Geneva early last month.
In an ironic twist, the calls for maintaining economic openness are also coming from the other direction - in particular from the representatives of western financial entities that would welcome an infusion of Middle-Eastern oil money. In a recent trip to the UAE, the deputy secretary of the US Treasury department, Robert Kimmitt, made overtures to Gulf investors to continue sending their money overseas. "I am taking the time to meet with sovereign wealth funds (SWFs) and other investors looking for opportunities in the US to make clear we are open to investment that is done on a commercial, not political, basis and that does not raise security concerns," he said last week in Dubai, according to the Indo Asian News Service.
There has also been increasing attention directed towards the Gulf's SWFs, which many see as potential sources of emergency cash for floundering western economies. Gulf investors, including Sheikh Mansour bin Zayed, Minister of Presidential Affairs, are preparing to invest up to £7.3bn (Dh43bn) in Barclays Bank, while the British prime minister Gordon Brown will visit the UAE this week to solicit contributions for the International Monetary Fund. In total, GCC countries hold an estimated $1.5 trillion in assets in investment funds, according to the Peterson Institute for International Economics, a Washington-based think tank.
However, many economists expect the GCC countries, with their vast stores of oil wealth, to protect their own economies first should global financial conditions get really tight. Sovereign wealth from Qatar and Kuwait has already been used to prop up sagging home stock markets, while the UAE has offered Dh120bn to the Emirates' banks. According to Mr Khan, if revenue from trade and oil exports falls enough, and the Gulf countries "end up having small deficits, their priorities are going to be the domestic economy. What they already have outside may remain, but whether they would be able to send more may be highly unlikely. You might see bargains all over the world, but with surpluses evaporated I don't think you'll see the same sort of investments that you've seen in the past year, year and a half".
Though cash infusions from Gulf SWFs into western economies have been met with scepticism in the past, Mr Cohen believes the shortage of money has changed outlooks. "Given the times we're in, I think we're going to welcome countries being able to invest in a way that saves jobs," he said. firstname.lastname@example.org