The protectionist beast is back in a subtly fresh form
IT’S a classic: during every recession, protectionism resurfaces. After four years of economic turmoil, unemployment is critical in the US (7.7 per cent) and Europe (11.7 per cent). Obviously, governments want to protect national companies and jobs, especially if they want to be re-elected.
But if protectionism is back, it’s also more subtle. Gone are the days when governments would apply tariff barriers (unacceptable to the World Trade Organization) or impose crude measures like targeting one “congested” entry point for goods entering their country (as the French did for Japanese video players in the 1990s).
Today, protectionism thrives on pollution standards, and health and safety requirements. “Buy national” campaigns and forced cooperation with local firms complete a wider array of measures available to scared administrations. The coat changes, but the beast remains the same.
It might be better to speak of economic nationalism. Many emerging economies are seeking to globalise their national champion companies. And they can rely on large reserves of cash. China has $3,300bn (£2,069bn) in foreign currency reserves, and Russia $530bn. Considerable money is also channelled to home companies through sovereign wealth funds: the Abu Dhabi Investment Authority manages $624bn, the Chinese State Administration of Foreign Currency controls $567bn, and the Russian National Welfare Fund has $149bn.
State-backed enterprise is a new form of protectionism: it means funding national companies with government money to help them succeed abroad. In China, 21 out of the 22 largest firms have close financial ties with the state. Meanwhile, their domestic market becomes increasingly difficult to penetrate.
The explosion of global brands from emerging markets, and their impact on world competitiveness, has forced advanced economies to react. Re-industrialisation has become the key word. In the past 20 years, the share of industry as percentage of GDP has dropped from 16 per cent to 11.2 per cent in the US, and from 17.7 per cent to 11.4 per cent in the UK. The share of world manufacturing of most industrialised nations has dropped by 20 per cent, with the exception of Germany. Re–shoring – bringing home manufacturing capacity – is increasingly fashionable. General Electric has brought back household appliances production from China to Kentucky. Apple and Hewlett Packard also plan to invest in manufacturing in the US.
The tension between economic nationalism in emerging economies and re-industrialisation in advanced economies will define world competitiveness in the years to come. Protectionism will be a tempting solution to these pressures. Certain governments will even use the threat of nationalisation to achieve their objectives, like the French minister Arnaud Montebourg’s action against Mittal. In the end, most governments will be careful: protectionism is a double-edged sword that can be returned against its user, even with a new coat.
Stéphane Garelli is a professor at the IMD business school in Lausanne, Switzerland. He also serves as director of IMD’s World Competitiveness Centre.