There are enough protectionist pressures these days that maybe it is worth considering, in the spirit of democratic responsiveness - rather than the spirit of global-elite managerial domination, not that there's anything wrong with that! - whether the times aren't right for protectionism.
Certainly there is enough evidence of a protectionist turn, although it comes more in the form of subsidies and incentives rather than tariffs, and is aimed at helping struggling industries. ("One does not have to be a cynic," Charles Schultze wrote some years ago, "to forecast that the surest way to multiply unwarranted subsidies and protectionist measures is to legitimize their existence under the rubric of industrial policy.") Last week, China announced various types of tax incentives and subsidies (including a substantial "green" plan) for autos as well as for steel; reportedly, Beijing will soon present similar plans for eight other sectors, including textiles, petrochemicals and shipbuilding. Some of these are aimed at production of export-based industries, but many are also directed toward stimulating domestic demand, as is the announced, but not yet implemented, fiscal stimulus. China has also bailed out some airlines and metals businesses. France, Germany, Russia, the U.S., Sweden and Canada are themselves all considering or implementing auto-industry bailout measures - again, often with a green component.
To a degree, it reminds me of the food-price scare last spring, in that autos (and steel, and airlines) partake of the "strategic sector" mystique. Very few people anticipated soaring food prices. But before you knew it, governments were hoarding and fixing prices and columns were being written about grains as a "strategic commodity": something that a government would need to protect from market forces as part of its commitment to protecting its people. Prices went back down, the scare receded. Yet I noticed that the Philippines last week was continuing in its confidential deal with Vietnam to secure a portion of Vietnamese rice production as a reaction to last year's crisis, which hit Filipinos very hard. It is significant that such a market-fixing deal is going ahead; it is also significant that it is a "secret" deal. This globalization pudeur is really striking. It reflects a conviction that the idea of open markets remains the norm, even if governments sometimes need to rig them.
That makes sense, because open markets have worked pretty well. Governments perform a tricky mediation between wealth-creating globalization (understood as aiming at openness, free trade, capital mobility, and competition based on comparative advantage) and national sovereignty (understood as the state exercising its responsibility to protect and nurture its citizens and express their will). In a crisis that is global, like this one, it is hard to figure out where a nation's responsibility lies.
Not that globalization is anti-government, exactly. Globalization always included something that might be considered a paradox: government, and an awful lot of it, was required to ensure the smooth functioning of free markets. This tended to be discussed in terms of the rule of law, good governance, transparent markets, internationally recognized banking standards, and so forth, but it was still government. And it was not merely a one-off, until-the-market-gets-established kind of government, either.
But such careful government regulation is understood as necessary to make competition fair; it is the framework, so to speak, for freedom. Part of what makes policymaking today so difficult is that the clear desirability of globalization provides little guidance on how to harmonize national and global interests. One wants to preserve the benefits of free markets at home and abroad - but how?
Even just getting it right nationally has proved extremely challenging. China may be willing enough to have the state retake a chunk of the economy; that's the direction in which its new policies lead. But for the capitalist countries that is much less attractive. So they have to find a balance. In the U.S., the bailout line today is basically that between owning a company and owning some of its assets. That is because owning part of a bank puts the government in competition, one way or another, with private owners, which could achieve just the opposite of what governments want: it would squeeze private investors out of the credit market rather than draw them in. (Perhaps worse, it could merely increase that sector of the financial world that makes its money by tracking changes in government policies rather than investing in the real economy.) So, rather than seeking outright ownership, states might buy preferred shares, with a payback plan, and try to stay out of actual corporate governance (as in the first TARP tranche of $350 billion); or they might seek to goose the risk spreads (that is, buy up the difference between what the market thinks the risk is on a loan and the price at which private investors would be willing to buy that loan, as in the Fed/Treasury joint program TALF); or they might guarantee eventual repayment of bad loans or even buy the bad loans outright (the various "aggregator bank" or "bad bank" proposals).
The trend just now, and heading into the Obama administration, does seem to be toward demanding much greater say in bank management as the price for preferred-stock and other recapitalization bailouts - and toward government acquisition of bad loans and increased government assumption of risks. Bad home loans, bad car loans, bad college loans, bad commercial real estate loans: as long as they were bad, there's a chance the government might buy them up. There's a certain perverseness to the government, in its reluctance to own a bank, deciding just to own that bank's garbage - particularly when the purchase price of the garbage is likely to be decided on the bank's terms rather than those of any market, or those of the government. (Let's remember that the question of bad-loan valuations and "mark to market" was critical to the beginning of this crisis.) I suppose you could think of it as like government-backed microlending in reverse: rather than starting from the idea that the market is missing an opportunity for very small-scale lending, and seizing that opportunity through government incentives, government will instead buy up the bad loans and renegotiate the repayments based on a politically determined acceptable price. If only the rich-world loans had gone for productive inputs (spinning jennies, anyone?) rather than wide-screen TVs!
What these programs still seem to be missing is a recognition that the problem has been not so much greed (which is a constant) but the excessive provision of the means for its expression (through easy credit) and the globalization of that profligacy through overvaluation of debtor-nation currencies (the dollar) and undervaluation of surplus-nation currencies (the renminbi). As Martin Wolf pointed out in his regular FT column last week, the weird thing about the Obama plan as presented a week ago was that it is so focused on America when the problem is really global.
Of course, there is no world government to fix this problem, and to the degree (see big caveat above) that globalization is a free-market phenomenon it should not require global government to, er, protect it. There have been feints in the global direction, however. Globally coordinated central-bank interventions were a feature of last summer. The Group of 20 meeting late last year displayed a level of we're-all-in-this-together rhetoric that seemed to surprise even some of the politicians giving the speeches. But these themes have not been widely taken up. Rather, national economies have seemed almost to diverge as the global bureaucracies have looked on. The World Trade Organization (like lesser such organizations) has been far from the center of discussion and policy-making, even with regard to its own core issues of fairness and protectionism. (The Group of 20 called urgently for a new WTO trade-round meeting, but after the excitement died down the G20 ministers decided not to hold it after all.) The International Monetary Fund has been distant, too -- despite some artful rescue packages -- even though currency imbalances are, historically, the reason the Fund exists. (Jessica Einhorn, dean of the School of Advanced International Studies at Johns Hopkins, proposed in the FT last week a big IMF role, but it was heavily weighted toward policing the surpluses of certain emerging-market countries and letting bygones be bygones re rich-country deficits. This is surely going too gentle on the First World.) The dropping of the ball by the international community could have very negative consequences. As Britain's prime minister, Gordon Brown, said yesterday, "Unless we come together to address these problems in a coordinated way, the world is at risk of a damaging spiral of de-globalizing. It is fuelled by a combination of deleveraging and national-only policy solutions."
I don't actually think national protectionism is going to undo globalization. There's too much money, for everyone, in global trade. But I do wonder about regionalization as a halfway house between national protectionism and globalization. There were many pre-crisis trends in that direction anyway. East Asian dollar-hoarding was itself something like a regional response to the East Asian crisis of 1997-98 - and in opposition to the IMF. Regionalism (and rejection of the IMF) has been a hallmark of Latin America in recent years. The European Union was, of course, a regionalist economic innovation. So was Nafta and the (still notional) Free Trade Area of the Americas. And while no real equivalent for Africa exists, there's certainly a drift in that direction, whether institutionally through, e.g., the Economic Community of West African States and the African Union, or in terms of the growing confidence of African investors in venturing across national borders. In the current crisis, the EU will, I expect, find a way to eliminate the possibility of euro member-state defaults - and thus protect the continent's currency. Meanwhile, one interesting trend from the past few months has been that trade among developing countries has been much less affected by the downturn than trade between developing countries and rich countries. Again, this is continuing an established pattern; indeed, free-trade advocates often sold their ideas to poorer countries by stressing that the real growth was in lowering trade barriers among themselves rather than in focusing on richer markets. Perhaps this global crisis will, in the end, be most amenable to regional solutions.
Where does that leave the U.S.? Politically uncomfortable, given that so many regionalist political and economic groupings have taken anti-Americanism (or opposition to American-dominated international institutions) as a least common denominator. How odd then that, as a global power, we might be becoming so dependent on them.
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I'm posting this on Martin Luther King Day, and just before the epochal inauguration of Barack Obama - epochal because of race, mostly, even given a healthy dose of ding-dong-the-witch-is-dead enthusiasm. I post this serene in the knowledge that practically no one will be shuffling around in the HuffPo looking for ponderings on the economic crisis. Nonetheless, it was wonderful to see such extensive, thoughtful and engaged comments on the last post, with its very sexy topic of savings. Well, we will all be here on Wednesday, having already gone through the shortest political honeymoon ever. Until then!