The Global Economy’s Dialogue of the Deaf

CHICAGO – As governments do more to try to coax the world economy out of recession, the danger of protectionism is becoming more real. It is emerging in ways that were unforeseen by those who founded our existing global institutions. Unfortunately, the discussion between countries on trade nowadays is very much a dialogue of the deaf, with countries spouting platitudes at one another, but no enforceable and verifiable commitments agreed upon. There is an urgent need to reform global institutions – and more dramatically than envisaged by the G-20 thus far.

Protectionism is not just about raising tariffs on imports; it is any government action that distorts the global production and allocation of goods, services, and capital to favor domestic producers, thereby reducing overall efficiency. So, for example, government pressure on multinational banks to lend domestically, or to withdraw liquidity from foreign branches, is protectionism, as are capital injections into multinational companies with the explicit requirement that domestic jobs be preserved.

Such actions are problematic not only because they insulate inefficient forms of production, but also because foreign countries respond by adopting similar measures towards their national champions, so that everyone is worse off. The number of inefficient workers protected by these measures is offset by the number of efficient workers laid off by foreign multinationals responding to political pressures in their home country. Perhaps of greatest concern, moreover, is that the public, especially in poor countries that cannot undertake offsetting measures, will come to distrust global integration, with multinationals viewed as Trojan horses.

In addition to explicit protectionist measures, governments now plan actions that will affect others across the globe. For example, the large volume of public debt that industrial countries will issue will undoubtedly raise interest rates and affect developing country governments’ borrowing costs. There is little dialogue about how industrial country issuances can be staggered to minimize the impact on global markets, and what alternatives can be developed for countries that are shut out. If developing countries are left to their own devices, they will conclude that they should self-insure by rebuilding foreign-exchange reserves to even higher levels, a strategy that has clearly hurt global growth.