Currency wounds fresh, but protectionism talk all muted

London: The world economy might be going through a crisis of capitalism, but, paradoxically, globalisation is alive and well. For now.

The Swiss National Bank’s dramatic step this week to cap the Swiss franc by pegging its value against the euro fanned fears of a new currency war as countries tried to shield themselves from unwanted capital inflows. That possibility is a headache that finance ministers from the Group of Seven industrial nations, who meet on Friday in the French port city of Marseille, could do without.

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But what is striking is that the clamour for protection against flows of trade, investment and finance is so muted despite the weakest recovery from the deepest recession since World War Two.

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According to the World Trade Organisation, only 1-2 percent of world commerce has been affected since the onset of the crisis by trade curbs of one sort or another.

The WTO’s own rules have played a part, but Razeen Sally, director of the European Centre for International Political Economy, a Brussels think-tank, said this was not the whole story.

“The main reason why we haven’t seen an increase in traditional protectionism is globalisation itself. It’s the existence of supply chains, which have provided spontaneous disciplines on governments and businesses not to raise the obvious barriers. That’s testament, if you like, to the strength of globalisation,” Sally said.

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So while protests proliferate in Europe against austerity and the loss of jobs to Asia, economic insecurity has not translated into widespread rejection of the global production and outsourcing that puts cheap goods on Western shop shelves.

Crucially, big businesses have a vested interest in keeping their supply chains operating. Tellingly, a U.S. move in 2009 to restrict imports of cheap Chinese tyres - a curb that the WTO this week ruled to be legal - did not trigger copycat curbs.

“Politicians may not make the case for globalisation generally, but they’re instinctively aware of the costs of doing further harm when that further harm is obvious like putting up a tariff or quota or slapping on a licensing arrangement. They’ve probably been lobbied by businesses accordingly,” Sally said.

Capital vs current account

George Magnus, a senior economic adviser to UBS in London, agreed that the degree of protectionism was nowhere near as severe as might have been expected, partly due to the need to keep intra-company supply chains intact.

But he said there were no grounds for complacency. A renewed recession, or a combination of protracted anaemic growth in Europe and America in conjunction with a slowdown in China after 2013, could spell trouble.

“That’s the sort of environment where the populist demand for protection from foreigners might take root,” Magnus said.

One straw in the wind is a pledge by Republican US presidential hopeful Mitt Romney to slap duties on Chinese imports unless Beijing swiftly floats its currency.

David Bowers, a managing director of Absolute Strategy Research in London, said the real risk to the global economy lay not with barriers to trade but to the funding of trade.

“What we have to worry about are capital account wars, not current account wars,” Bowers said.

He said he feared regulators, in their zeal to protect banks in their jurisdiction, could create a home bias that would throw a wrench in the gears of global finance.

Far more disturbing than the Swiss National Bank’s actions, Bowers added, was the way US money market funds abruptly reduced their lending to European banks in early August, contributing to a confidence-sapping slump in equity markets.

“What was striking before the crisis was how deep private cross-border capital flows were. They made globalisation possible. The biggest threat is that, through myopic national bank re-regulation and deleveraging, you begin to pick away and fragment the idea of a global capital market,” he said.

No return to 1930s

Sally at ECIPE said he, too, was worried about “regulatory protectionism” stifling both trade and investment.

The United States and China both imposed restrictions on foreign firms tendering for public procurement contracts up for grabs as part of anti-crisis stimulus packages.

Governments around the world are introducing technical standards in areas such as health and the environment that in effect discriminate against foreign firms. And there has been a flurry of investment protectionism, with governments citing the national interest to block the foreign takeover of prized firms, especially in natural resources.

“I don’t want to sound alarmist about this because there hasn’t been a sudden increase. But it’s creeping, and it’s not the sort of thing that is as easily contained as traditional tariffs and quotas,” he said.

Much the same could be said of financial flows.

Governments from Brazil and Chile to South Korea and Indonesia have taken various administrative measures – speed bumps rather than impenetrable barriers - to brake unwanted capital inflows over the past couple of years.

Switzerland’s putting a floor under the euro followed the record sale of 4.5 trillion yen by the Bank of Japan on Aug. 4 to hold down the yen. China famously keeps a tight grip on its exchange rate and its capital account is largely closed.

“If we are finally at the beginning of a currency war, that could spill over into more trade and investment protectionism,” Sally said. That would evoke parallels with the Great Depression of the 1930s.

“But I don’t believe that scenario yet, and we have the kind of globalisation that we didn’t have then, which provides us with a kind of insurance policy even if we have a zero-sum currency competition,” he said.

Reuters