Protectionist threat to global growth

The following is a comment by me from the 9 April issue of Fund Strategy.

The past few days have seen mixed news on the world economy. The bad news emanates from America while good news originates in emerging markets.

Probably the worst news is America’s decision to impose tariffs on imports of “coated free sheet paper” from China. The Commerce Department has deemed that China is providing unfair subsidies to this industry. Therefore, so the argument goes, America needs to take action to level the playing field between the two sides.

Clearly America’s move is symbolic. It is concerned about China’s huge trade surplus with the US. The tariffs on paper are therefore designed to encourage China to curb its exports to the US or buy more American goods.

Some might argue America’s recently announced free trade agreement with South Korea to an extent offsets its protectionist measures against China. But this is the wrong way to look at the move. The bilateral deal with Korea, giving it preferential access to the American market, is another form of protectionism. America rewards some countries and penalises others as part of a concerted trade policy.

It would be far better if America lived up to its rhetoric of free trade. In principle trading relations between different countries have the potential to benefit all parties in the relationship. Living standards can rise as each country focuses on what it can produce most efficiently.

In contrast, protectionism threatens to fracture the world economy. It could lead to a situation in which there is less trade, not more. As a result everyone, particularly the poorer countries, could suffer.

Fortunately some good news has offset the bad. Figures from the Asian Development Bank, in its annual Asian Development Outlook, forecasts GDP growth in developing Asian at 7.6% in 2007 and 7.7% in 2008. The two demographic giants of the region, China and India, together account for much of this growth.

Even better news is the expansion of the African economies. The continent looks set to grow by 5.8% in 2007 after its 5.7% in 2006, according to the United Nations’ Economic Report on Africa 2007. It is growing from a meagre base but the trajectory is hopeful. The main worrying sign is its continuing dependence on primary commodity exports.

If only America, and the West in general, allows the emerging economies to continue to grow then everyone could benefit.