Monday, February 2, 2009

The Chill of Protectionism

The Wall Street Journal - DAVOS, Switzerland --The chill at last week's global economic conference wasn't from the Alpine air but from the threat of financial protectionism.

Public officials and business leaders warned that the global recession could sharply reduce lending across borders and lead to more subsidies tucked away in economic-stimulus plans. Investment of private capital to emerging markets this year is expected to be 82% lower than it was in 2007. The Institute of International Finance, an association of the world's largest banks, said that in emerging European countries, which had been engines of growth, the volume of flow is expected to be $30 billion in 2009, down from $254 billion in 2008.

"If you go around the world, then what you are seeing is the withdrawal of banks from a number of emerging-market countries with a pretty weak domestic-banking system," British Prime Minister Gordon Brown said in an interview with The Wall Street Journal. "What you've got then is a form of financial mercantilism. What you've got is people retreating to their home-based banking systems. It's the first stage of a financial protectionism that will lead eventually to the kind of trade protectionism that we've seen in the past."

A repeat of 1930s-style tariff wars is remote, but the new form of protectionism could play out in Depression-era style. If a few major nations favor their own industries at the expense of foreigners, invariably so will others, producing rounds of retaliation. That could choke off trade further -- the International Monetary Fund already predicts a 2.8% decline in trade in 2009 -- and clog a global engine of growth.

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