Not only is the world economy set for the worst recession since the interwar years, but there’s also a “dangerous whiff of protectionism in the air”, said The Daily Telegraph. If it takes hold, our “future is bleak”. It was the 66% slump in trade amid increasing barriers to trade and beggar-thy-neighbour policies that made the Depression Great.
Protectionism: tensions are mounting
As the world economy slumps, the “potential for a downward spiral” of currency devaluations to give export industries an advantage becomes “ever greater”, said Jeremy Warner in The Independent. Japan has hinted at renewed currency intervention to stop the yen climbing further, while US Treasury Secretary Tim Geithner accused China of manipulating the yuan to keep it low against the dollar. The worry is that China could opt for a major devaluation to stimulate its slumping economy, incurring US retaliation in the form of much higher tariffs on Chinese goods.
Meanwhile, European car-makers are being subsidised by governments, which is also a form of unfair competition. The more governments try to prop up their own industries “in the hope that someone else will fail and lower capacity”, the likelier a subsidy war becomes, said the FT. A subsidy war is another form of downward spiral.
It’s also worrying that lawmakers have been lobbying for the US stimulus package to include a “Buy American” amendment demanding that government spending focus on US goods. There’s ample scope for harmful “tit-for-tat retaliation” from trading partners, said Lex in the FT: a fifth of American industrial workers make manufactured goods for export. A further worry is financial protectionism, said Edmund Conway in The Daily Telegraph. Governments around the world are telling cash-strapped banks to lend to domestic rather than foreign firms. This has happened before, “but never in a world which has become so reliant on international financial flows”. So it’s no wonder protectionism is high on the Davos agenda this week. As The Economist said, “the stakes are extremely high”.