Mark Lamb | Sunday, 08 February 2009

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The rise of protectionism

Weekly international investment round up to 6th February 2009

Protectionist stance ends the ‘Obamamoon’ among world leaders

Trade barriers and sabre-ratting is likely to make things worse, not better

Usually among the first to claim their annual all-expense-paid seats at the ‘World Economic Forum’ held in the beautiful Swiss town of Davos, the Wall Street bankers were conspicuous by their absence last week. Also missing were the celebrities who would normally use such an opportunity to promote their chosen good causes in an attempt to shape the thoughts of some of the most important leaders and tycoons on earth who have gathered there each year since 1971. This year was different, there was only ever going to be one topic of conversation in town: the current economic crisis.
The first day saw keynote speeches given by Russia’s Prime Minister Vladimir Putin and China’s Premier Wen Jiaboa and it was payback time for those in the West who they saw as the architects of this current financial turmoil. Later, South African Archbishop Desmond Tutu spoke of how “we worshipped in the temple of cutthroat competition and so some cooked the books, because the treasure is so great.”
Although most of the event was spent describing the problems and not their actual solutions, investors would note the worrying tone which resonated throughout the forum concerning the rising threat of protectionism.
The growing social unrest being seen in the UK, France and Russia demonstrates the real repercussions of bad economic decisions, even arch-capitalists America are contemplating the implementation of greater protectionist measures.
With rising unemployment and growing disquiet it is only natural for each economy to consider resorting to trade barriers, sabre-ratting and barbed wire to protect their domestic markets but in reality this is likely to result in tit-for-tat measures which could actually make things worse.
President Obama’s initial plan to introduce a ‘Buy American’ clause in his latest stimulus package could quickly end the ‘Obamamoon’ period among other world leaders and trigger disastrous retaliatory action but such measures as these should not really come as any surprise as when both he and Hillary Clinton were Democratic Presidential candidates they openly backed restrictions to free trade agreements in order to protect the American worker.
America’s economic empire has been built upon the pillar of free trade so any shift in policy would be dramatic. Increased trade has helped open new markets for their companies to sell their products to and in the past free trade agreements have actually boosted the American economy more than it has hurt it. For example NAFTA (North American Free Trade Agreement) helped increase trade in the region from $297 billion to $810 billion while research from the Peterson Institute for International Economics estimates that actually ending all trade barriers would increase US income by $500 billion.
According to the World trade Organization 1.3 million export-related jobs were created between 1994 and 1998 in the US while it estimates the formation of the European Union free trade area created up to 900,000 net new jobs. In short, free trade creates more jobs for an economy than it loses.
For investors, the increase in protectionism is likely to cause slower economic growth and more unemployment and offers no antidote to the current crisis.

Mark Lamb is Head of Life at Citadel Insurance plc which is authorised to carry on general and long term business of insurance under the Insurance Business Act, 1998 and is regulated by the MFSA. Contact by email; mlamb@citadelplc.com Tel; 25579000. Website; www.citadelplc.com
This article does not intend to give investment advice and its contents should not be construed as such. Information in this article has been obtained from various public sources and is given by way of information only. Readers are always encouraged to seek financial advice before making any investment decision.

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