Protectionism Resurgent

This might be one of those turning points in economic and political affairs. In economics, we might be seeing the end of the era of free trade. In politics, we might be witnessing the reemergence of nationalism and its close cousin, protectionism. The result will surely be a less efficient use of the world’s resources.

International trade consists of the movement of goods, services, people and capital. Since the end of World War II the trend has been to make the movement of those four resources progressively easier. Consumers have been showered with a greater variety of goods at lower prices; workers in developing countries have gotten jobs producing those goods; other workers have moved across borders in search of jobs and higher living standards; and, because capital has been allowed to flow to countries with attractive tax regimes, those countries have received a flood of job-creating inward investment and, in the process, forced other countries to restrain their inclinations to raise taxes.

True, there are some losers, most notably workers in developed countries who are displaced by lower paid employees in the developing world, but by and large the benefits of free trade do exceed its costs.

But that doesn’t seem to matter to the world’s politicians, who hear from the usually well-organized losers, but not from the millions of dispersed consumers who are the (often unknowing) beneficiaries of a free-trading regime. Most often, they respond to complaints by banning imports of whatever product has aroused a portion of the indigenous work force to threaten retaliation at the polls.

President Bush clamped down on steel imports when angry workers in key states threatened to tip a close election against him, and provoked retaliation from America’s trading partners. EU trade commissioner Peter Mandelson recently took steps to impose anti-dumping duties of up to 20% on European imports of some shoes (children’s shoes and some sneakers are exempt) from China and Vietnam, with four million and 500,000 workers, respectively, turning out shoes, to protect workers in Italy and Spain, among other places. China has threatened to stop buying made-in-Europe aircraft. As wise old Teyve pointed out in “Fiddler on the Roof” once noted that in a world of an eye-for-an-eye and a tooth-for-a-tooth, “the whole world we will be blind and toothless.” In a world of tit-for-tat trade barriers, we may all soon be paying a lot more for steel and shoes, as we are already paying more for food in order to protect France’s mostly rich farmer.

Services, too, are hardly being traded freely in international markets. Many developing countries do not allow foreign banks, insurance companies and brokerages to operate in their countries, and show little signs of surrendering those restrictions. More important, last month the European parliament caved in to pressure from Germany and France, and watered down a Commission proposal to open up the EU to cross-border trade in services.

Add to the impediments to the free flow of goods and services barriers to the free movement of labor. It is certainly true that workers flow from country to country in greater numbers than ever before, either legally or illegally. But pressures are growing to stem that tide of willing workers seeking to get hired by employers who contend that indigenous workers are either unavailable or insufficiently skilled to meet their needs. Britain has been welcoming workers from Eastern Europe: one employer told me that skilled workers from Eastern Europe have better English writing and speaking skills than many UK-educated workers. And America has been welcoming Mexican workers, with over 10 million now working legally and illegally in the United States.

But Germany, France and other continental European countries bar most immigration from the East, partly in reaction to the high levels of domestic unemployment created by their growth-stifling high taxes and generous unemployment benefits.

And America’s politicians are refusing to go along with the requests of President Bush and Senator John McCain to regularize Mexican immigration. Instead, a fence is being built to slow the cross-border flow of immigrants – a process that was recently slowed when immigration officers found that the fence-building contractor employed a large number of, you guessed it, illegal immigrants.

Until now attempts to throttle free trade were largely confined to goods, services and people. Now, politicians the world over are moving to prevent capital from crossing borders. No surprise, France is leading the way, proposing to insulate eleven sectors of its economy from foreign takeovers. President Jacques Chirac and prime minister Dominique de Villepin want to make especially certain that French energy companies are not taken over by foreigners as the European industry consolidates in anticipation of its impending deregulation. So they brokered a merger of two French energy companies, Gaz de France and Suez SA, to fend off a possible takeover of Suez by Italy’s largest power company, Enel. Although French President Jacques Chirac told Italian Prime Minister Silvio Burlesconi that he viewed Enel’s plans as “hostile”, the French deny violating the law and spirit of the EU common market by interfering in the transaction. Burlesconi, who did not intervene when Italy’s second largest power company was taken over by Electricité de France, or when Banca Nazionale del Lavoro was acquired by France’s BNP Paribasto, professes himself shocked, shocked at the French action. And European Commission president José Manuel Barrorso railed against “nationalistic rhetoric” of the sort France so vigorously opposed when pushing tighter European integration.

French antipathy to an invasion of foreign capital extends beyond its own borders. The government is adamantly opposed to the hostile bid of India’s Mittal for Luxembourg’s steel maker, Alecor, itself the product of a merger of French, Belgian, Luxembourg and Spanish steel companies. Thierry Breton, France’s finance minister, claims that Alecor’s large workforce in France makes his government a “stakeholder,” entitled to review everything from Mittal’s plans for R&D spending to its social behavior.

Meanwhile, although Spanish companies have been on a worldwide takeover binge, when German power company Eon launched a $35 billion hostile bid for Spanish utility Endesa, the government announced that it “Will do everything in its power to ensure that Spain’s energy companies remain Spanish.” Trade and industry minister José Montilla is leading the charge to have the home-town boy, Gas Natural, a company half Endesa’ size, mount a competing bid.

Poland, too, is defying the European Commission by blocking Italian bank UniCredit’s bid for local Bank BPH. And its former masters in the Kremlin are declaring 39 “strategic sectors” off limits to foreign control.

Here in America, politicians, led by Hillary Rodham Clinton, are in full cry against the takeover of P&O by Dubai Ports World, and are preparing to attack the planned takeover of UK-based Doncaster by another Dubai-based company: Doncaster’s plants in Georgia and Connecticut manufacture components for military equipment.

Almost alone among the world’s leading trading companies, Britain seems unfazed by foreign takeovers. London Electricity has gone to France’s EDF, Pilkington glass to a Japanese company, P&O to a Dubai-based company, and mobile operator O2 to a Spanish company. Only an attempt by one of Russia’s Putin-controlled companies to take over Centrica, a leading energy utility, is likely to be an acquisition too far.

With the free movement of goods, services, people and capital all under threat, the already dim prospects for a successful conclusion to the Doha round of trade talks seem to be flickering out. The world will be the poorer. But there is some good news: the resurgence of nationalistic fervor certainly will slow, if not halt, the drive of the European integrationists to obliterate the traditional nation-state.

A version of this Update appeared in The Sunday Times (London)