x Abu Dhabi, UAEThursday 27 July 2017

Free trade should not become a victim of Wall St

The recession is over, at least in Asia, thanks to a reliable formula for growth: fiscal largesse and closed markets.

The recession is over, at least in Asia, thanks to a reliable formula for growth: fiscal largesse and closed markets. It worked for Japan, where authorities rebuilt the nation from its post-war rubble by issuing policy loans to large groups of industrial companies while protecting them under a hothouse of tariff and non-tariff trade barriers. The rest of Asia followed suit, and the tactics that so enraged western trade officials became a compelling guidebook for the developing world.

But the "Japan model" was prone to destabilising bubbles, a consequence of inflexible monetary policy. And with each collapse in asset prices Asian leaders vowed to liberalise. After the Asian currency crisis of the late 1990s, countries from Thailand to South Korea embarked on an epic free-market makeover. Barriers to trade were dismantled and personal consumption was encouraged. The region thrived, so much so that it was the last economic bloc to get sucked into the global recession and it appears it will be the first to recover. A flurry of economic statistics from Asia last week, from positive earnings reports to China's bullish industrial output figures, suggests the worst is over.

Unfortunately, Asia's response to the crisis, in addition to enormous stimulus plans, was to resort to protectionism. The trend is particularly pronounced in China. This week, the World Trade Organisation (WTO) declared Beijing illegally restricted imports of books, movies and music. The Rio Tinto scandal took another turn as China charged executives from the mining giant with bribery in what appears to be retaliation for the Australian company's reversal of its decision to accept US$19.5 billion (Dh71.62bn) in equity from state-owned Chinalco.

As this column has noted, China is subsidising contractors to its renewable energy industries, namely wind-turbine producers, at the expense of their European rivals. In June, China rolled out its "421 Project" in which the government hopes to procure $42.1bn of locally produced machinery and electronics goods to try to stimulate domestic industry. India has followed China's lead in raising tax rebates for exporters while restricting imports of Chinese toys. Malaysia has prohibited the hiring of foreigners in factories, stores and eateries to promote employment among its citizens. South Korea plans to double import tariffs on raw materials such as wheat and flour, and it is stalling foreign investors over incentives it pledged them as part of its $35bn Songdo City development.

In a magazine essay last week, Yukio Hatoyama, the leader of Japan's political opposition and an odds-on favourite to become the country's next prime minister in coming elections, condemned "US-led market fundamentalism" as the source of economic insecurity in the world. What was so startling about Mr Hatoyama's manifesto was that there were so few free-market advocates left to respond to it, beginning with Barack Obama, the US president.

In Guadalajara, Mexico, this week for a summit meeting with his counterparts from Canada and Mexico, Mr Obama pledged he would not renegotiate the North American Free Trade Agreement (FTA) as he has threatened to do in the past. But he said nothing about the "buy American" provision in his $787bn economic stimulus package, nor has he done anything to roll back farm subsidies, which reward inefficiency and penalise foreign competitors who lack the size and political muscle to buy friendly government policies of their own.

Egyptian cotton growers, for example, are likely to produce their smallest crop in a century this year in part because of price supports on US Pima cotton. Is this the end of free trade? Can a revival of five-year plans be far behind? Not necessarily, if a recent US government report is anything to go by. Last month the government accountability office released its conclusions from a study of free-trade agreements the US has with Jordan, Singapore, Morocco and Chile, a sampling of the 14 such agreements Washington has signed since 2001.

The office found that the treaties "largely accomplished US commercial objectives" while yielding reciprocal dividends for its partners. Since FTAs were introduced, according to the report, the value of two-way trade between the US and the four countries surveyed increased by between 42 per cent and 259 per cent, well above forecasts. On the US side, the accords eliminated tariffs, increased intellectual property rights protection and strengthened transparency and fairness in government regulation and procurement.

Moreover, all of the four partner countries reviewed improved their labour laws since signing their agreements and several had strengthened environmental regulations. Granted, there are much better ways to go about promoting free trade than through FTAs, which are driven as much by political interests as commercial ones and can overlap or even undermine agreements negotiated by the WTO. But the accountability office's report proves that, given the proper attention and incentives, trade reform can create jobs and wealth.

Economic nationalism is a lot like the Federal Reserve's "quantitative easing" of interest rates; once unleashed, it is hard to know when, or even how, to bring it to heel. It would be wasteful indeed if the ancient human impulse to create, explore and trade was to become another victim of Wall Street's capitalist excesses. business@thenational.ae