x Abu Dhabi, UAEFriday 21 July 2017

Building the walls of protectionism in hard times

Tough times bring decisions driven by hysterical public pressure, and when it comes to venting political pressure, foreigners are the path of least resistance.

The hive of activity at the Hamburg shipyard reflects the emphasis many German companies are putting on getting their equipment ready to cope with the increased demand they expect to kick in once the world economy starts picking up again.
The hive of activity at the Hamburg shipyard reflects the emphasis many German companies are putting on getting their equipment ready to cope with the increased demand they expect to kick in once the world economy starts picking up again.

The world is in an angry and ugly economic mood and countries are looking for quick-fix remedies, including erecting protectionist trade barriers and other "beggar thy neighbour" policies. Governments are in a schizophrenic state, on the one hand warning of the threats to trade and capital flows posed by "deglobalisation", where nations retreat in on themselves, while on the other hand they seem unashamedly to be practising it in their own backyard.

Tough times bring decisions driven by hysterical public pressure, and when it comes to venting political pressure, foreigners are the path of least resistance. They can get mad at you, but they can't vote you out of office. The implications for the GCC countries will be to negotiate on a bloc basis and ensure that any protectionist countermeasures they take support all member countries. Concerns about protectionism have been rising for some time, and observers expect recriminations to start in the Group of Seven (G7), but be directed towards emerging-market countries rather than pitting industrialised nations against each other. The low-cost exporters of Asia seem the most likely to attract the blame. The EU has started the ball rolling with its move to reinstitute dairy subsidies that have existed for 40 years, but were temporarily suspended two years ago.

The risk of protectionist policies arising appears to be greater between individual nations, or as unilateral measures already cropping up in Latin America, rather than bloc against bloc. There may not be a spiral of recrimination under way, but there is every reason to expect periodic flare-ups. The US President, Barack Obama, for example, has already told the Mexicans to expect talk on revising the North American Free Trade Agreement. Potentially far more damaging are "buy American" provisions in the stimulus bill passed by the US House of Representatives, which have raised the hackles of the EU.

The bill would bar imported steel from being used in the infrastructure projects funded by the stimulus. A Senate version had gone further, but the senators finally approved an amendment requiring that provisions in the bill comply with international trade agreements with Canada and the EU to ease concerns over a trade war. It is no coincidence that "buy American" provisions first appeared in US legislation during the Great Depression.

In the GCC, there has always been some industry protectionism, especially in the awarding of government contracts, which stipulated a "local content", but World Trade Organisation accession provided foreign companies with easier access to bidding on such projects. In the depressed economic climate and with the flurry of project slowdowns and cancellations, it will be somewhat politically harder for GCC governments to insist on a fairer "level playing field" that allows foreign companies to take major contracts from national companies. The protectionist mood has spread to worker action, as exemplified by the refinery workers strike in the UK against Total's decision to bring in Italian workers.

While one feels some sympathy for the UK workers, in practice the strikes set a dangerous precedent and potential impediment for future flows of international investment. If this type of anti-foreign backlash spreads to GCC countries trying to court foreign direct investment, then foreign companies might not be tempted to invest if they cannot bring in their desired labour. International obligations bring with them responsibilities. Britain, for example, is part of the single European market. It opened up its labour market as part of it accession obligations. The reality, however, is more complicated than the principle. There was always a downside to the free movement of labour, in the form of depressed wages in some sectors and fewer vacant jobs. As long as those who lost out were mainly unskilled workers, public awareness and sympathy were limited. But with the current downturn, skilled manufacturing and white-collar jobs are being lost.

Even export-led economies such as Germany's are suffering, while in France rising unemployment has precipitated the strikes that brought the nation to a halt. Rates of growth in the Baltic states, once the darlings of the free market, are falling sharply, fuelling street protests. The knee-jerk response is the one being demanded by the protesters around the world: preferential treatment for nationals - protectionism by another name. Even Russia and India are levying tariffs.

It is the fear of unemployment among nationals that is at the heart of the new protectionist march. Among the growing number of anxious workers around the world, the slogan that will be loudly heard by governments is "national jobs for national workers", a catchy phrase with ready appeal. It is also an alibi and a clarion call to foreign labour market xenophobia. In some countries, governments have been quietly or loudly warning national companies against using the financial crisis as an excuse to fire national employees.

National companies have responded by freezing jobs and shedding foreign labour. Batten down the hatches is the byword now. Dr Mohamed A Ramady, a former banker, is a visiting associate professor in the finance and economics department at King Fahd University of Petroleum and Minerals in Dhahran, Saudi Arabia