EDITORIAL: A rising protectionist threat

Emerging nations toy with turning their backs on free trade

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India last week hosted a forum of the most powerful developing nations to discuss various trade and political issues. The BRICS summit - so named after its members Brazil, Russia, India, China and South Africa - closed with the usual self-congratulatory remarks about global cooperation, but Brazil’s comments stood out as a significant step in the wrong direction.

Brazilian Trade and Industry Minister Fernando Pimentel led an attack on the Federal Reserve’s loose-money policy and increased global liquidity, which have driven up the Brazilian exchange rate, making its exports uncompetitive. As the global economy slows, it would be a shame for this style of protectionism to rear its ugly head. Market liberalization has been the key to remarkable gains in the fight against poverty in India and China. The General Agreement on Tariffs and Trade (GATT) - incomplete and imperfect as it is - has secured a freer trade environment by preventing a repeat of the suicidal tariff wars that plagued the 20th century.

Raising tariffs, as Mr. Pimentel is threatening to do, benefits no one, other than the protected industries. The provision in the GATT that permits developing countries to retain or impose tariffs under certain conditions was a political compromise; it has no economic justification. Just like any consumption tax, tariffs hit the poorest the hardest. They are a lose-lose proposition.

Brazil’s economy has slowed, but not because of currency appreciation alone. The leftist government has increased taxes sharply and made it much more difficult to do business. Similarly, India is facing a slowdown in its growth rate, which also can be correlated to its own failure to push ahead with internal reforms. The recession in Europe and slow growth in the United States, its largest trading partner, inevitably affect India’s economy. Nonetheless, the path forward for the world’s second-most-populous nation necessarily involves more liberalization and reform, not retreating into the failed policies of protectionism.

China, as a recent World Bank report discussed, is reaching the end of gains from its mercantilist policies. The Middle Kingdom has its own issues of currency manipulation to deal with, which adversely impact the Chinese people as much as anyone else. China needs to undertake deep structural reform, open its markets, and embrace the notion that imports are a good thing. Only then can it stay on a growth path that will lead it to rich-country status.

The United States and the European Union (EU) are far from blameless, as both continue to pursue unsustainable fiscal policies. The EU debt crisis is well into its second year, with no serious resolution in sight. The EU and the International Monetary Fund keep offering temporary solutions that increase debt and liquidity in the global markets. The Federal Reserve’s loose money has not helped the situation.

The global economy remains fragile. Protectionism, and any retreat from the gains of free trade made since the GATT went into force in 1947, will make recovery that much more difficult.

The Washington Times

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