Overview
Economics 101 asserts that free trade yields more abundant goods and services. Specialization and trade enable each region to focus on their relative strengths and benefit from the economies of scale. Without trade, there would be no citrus fruits in the winter, steel in Paris, nor bananas year-round. For a variety of reasons, the free trade mantra is breaking down with global implications.
The tragedy at sea captured by a London Illustrated News artist Norman Wilkinson
The Drivers
Just recently, the current administration announced a round of tariffs on Chinese-made goods, presumably in reaction to the support China has given Russia in the Ukraine War.
These Chinese-focused trade restrictions were preceded by much more restrictive sanctions of Russian goods and services, as well as sanctions of hundreds of individual Russians.
Additionally, there is talk of using Russian assets that have been ceased by Western governments to fund Ukraine’s efforts in their war with Russia. Perhaps this would be payback for the Russian government’s seizing of various assets such as Western planes leased in Russia.
Adding to the list is the seizing of vessels in the Middle East, an event which previously would have been met with a harsh response. Lest one assumes these actions are the work of the current administration, bear in mind, the hallmark of the prior administration (i.e., Mr. Trump’s), has been and remains “Make America Great,” suggesting the U.S. has been shortchanged in its international dealings.
Lastly, there are periodic threats to cut off the banks of errant countries from the SWIFT system, which would make it difficult for them to conduct international business under the current regime.
Assuming we have convinced you that the trend against globalization is real, the two major outstanding questions are (1) whether it will continue and (2) what are the implications.
Longevity of Protectionism
Our view is that it will continue as it is a manifestation of a change in the global order. The political incentives for protectionism are likely to persist; political gain may be sought from protecting a certain constituency’s concentrated economic interests from the dispersed interest of others. This phenomenon isn’t new: the British Navigation Acts (1651 to 1849) and Corn Laws (1815 to 1846) were both designed to benefit politically important constituencies. However, globalized free markets are relatively modern and have been enabled by American economic and military hegemony.
The hegemony of the United States is being challenged in a not too subtle manner by China and its allies, and the U.S. is struggling to find the best path forward. The wiseman Dr. Kissinger admonished administrations to do all that was possible to keep Russia and China separated, advise which recently appears to have fallen on deaf ears.
Implications of Protectionism
Regarding the implications, there are many, not all of which are negative. Our view is that among allies, little will change, and ties will probably strengthen. We have already seen Mexico, Vietnam, and the Philippines benefitting from the shifting of manufacturing away from China. Likewise, Iran has benefitted from its increased trade with China and Russia, albeit from a low base.
The more complicated cases are those countries which have not clearly picked sides or are attempting to straddle sides. Both Turkey and India come to mind. Turkey’s strategic position and moderate size provides it options that many other countries do not have, enabling it to be more independent than the typical Western-focused country. Likewise, India, which sits on the critical trade route between Europe/ Middle East and Asia.
Adding to the complexities and headaches for the U.S. State Dept. are the ambiguous positions of both France and Germany, which have a great deal to lose from Russia’s Ukraine actions (assuming Mr. Putin’s ambitions extend beyond Ukraine). Mr. Trump is questioning the wisdom of the U.S.’s role as a global policeman particularly when fiscal and trade deficits are at relative highs. Assuming the polls are correct, and Mr. Trump retakes the White House, it will be interesting to see how conditions might change.
In our opinion, the pressures will remain, but the approaches will be different. A starting point is likely to be an insistence that Germany and France carry a larger portion of the burden of containing Russia and probably renewed pressure on others. If deterrence is required, there is likely to be more. However, the fear is that actions careen out of control and that the support built among allies might waiver.
The reality is that with change comes both opportunities and risks. Our view is that the old-world order is rapidly being replaced by a new one with massive implications. We suspect we will be revisiting this De-Globalization issue in the not-too-distant future.