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The Financial Express

Protectionism - the most dominant trend around the world

| Updated: October 22, 2017 20:33:15


Protectionism - the most dominant trend around the world

Global trade has been slowing down since 2008 following the Global Financial Crisis (GFC) and will likely to continue so in 2017 also.  Almost 30 years preceding the GFC global trade recorded an annual growth of above 5.0 per cent on average. This was also the period marked by increasing market convergence resulting from changes in economic structure, consumer behaviour and distribution networks. This phenomenon has been often described as globalisation. Globalisation has changed the competitive environment around the world.
The view that globalisation has diluted the concept of national economy to the point being redundant is rather a very simplistic argument. In fact a nation-state exerts tremendous influence on its economy and that control is reflected in a variety of ways in managing the economy, especially its external economic relations. At the macro level state remains the principal organ to manage the economy through fiscal and monetary policy. Quite often it also intervenes in the foreign exchange market. But also at the micro level the state exerts tremendous power in relation to such matters as product quality, safety, environment, anti-monopoly and consumer protection laws. Regulations relating these issues can have significant impact on trade flows.  These are also issues related to technical barriers to trade.
It now appears that even though global economic activity may pick up that is not likely to translate into stronger trade growth. There are a number of reasons for this which includes both structural and cyclical factors.  The integration of production into global value chain (GVC) by locating stages of production in countries with comparative advantage to gain global competitive advantage has reached its maturity.  This integration led to the increased trade in inputs and intermediate goods  but now that phase is almost over. This is now impacting negatively on investment flows which are considered as the major contributing factor to the growth of global trade.
The growing trends in market convergence resulting from changes in economic structure, consumer behaviour and distribution networks lead to the convergence of factor demand. Such structural changes have impacted on the relationship between trade and investment. Trade, the traditional vehicle of linking national economies, now has been joined by foreign direct investment (FDI) in full force. So the both trade and investment flows have implications for financial markets and technology flows. 
Many manufactured products and services are best produced in the markets which they serve so that the producers can respond quickly and flexibly the changing demand for particular product varieties of the product or the service. This is another factor contributing to capital flows across the world thus working as a substitute for trade flows. But at the same time demand for a large number of products is converging globally in general and developed countries in particular. This has enabled multinational corporations (MNCs) to reap the benefits of both the economies of scale and scope with the help of new technologies on a global scale. 
We have also witnessed declining commodity prices in the past years causing a decline in the value of trade and at the same time reducing the capacity to import by commodity-exporting countries which are mostly developing countries. In addition to slow pace of growth in trade, there has been slowdown in global growth as well as investment. Most advanced economies in the world, in particular in Europe, have been experiencing very high levels of unemployment, in particular youth unemployment, since the Global Financial Crisis (GFC), 2007-2008.  High levels of unemployment and wage stagnation in these countries are also negatively impacting on domestic demand which in turn similarly impacts on imports.
The most serious challenge now facing the global trading environment is the rising protectionism in both developed and developing countries and this by implication means stagnation in liberalisation process across the world. In effect, protectionism has turned into the most dominant trend around the world. Despite developed countries public stand to undertake coordinated efforts to stimulate global economic activity through more open economic engagement, they appear to be more inclined to prioritise their own individual problems as is happening in the USA now. This kind of policy initiatives only lead to more protectionism, deceleration in global value chains production causing further slowdown to stagnation in global trade flows.
A strong rule-based global trading system is now essential for not only to stimulate growth but also to ensure global stability. Instead we are witnessing a growing backlash against globalisation. This backlash can largely be attributed to a concern that trade causes disruptions in the labour market.  While the concern is genuine, the emphasis on its cause is totally misplaced.  Obviously, the concern deserves response but blaming trade is not going to resolve the problem; rather trade can be the major instrument that can stimulate growth and employment.  The current global trend looking inward and closing borders to trade will only further worsen the situation. Reinvigorating the multilateral trading system and making it stronger and more inclusive can work as a means to spread the benefits of trade more widely. 
Bangladesh as a country enormously benefitted from the open multilateral trading system under the auspices of the World Trade Organisation (WTO). Yet Bangladesh remains one of the most closed economies in the world. Economic performance of Bangladesh will largely depend on the links the country establishes with the rest of the world through trade and investment, and technology flows. These linkages are forged through trade in goods and services and technology transfers. That will require Bangladesh to remain competitive and improve efficiency drawing on the available resources. That is only possible by remaining an open competitive economy. 
The writer is an independent economic and political analyst.
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