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Wednesday, Feb. 4, 2009

Protectionism not the answer


British Prime Minister Gordon Brown has rejected protectionist measures to mitigate the effects of the present world economic crisis and has condemned the anti-globalization lobby as ignorant and misguided. He and Lord Mandelson, the minister responsible for business affairs and a former EU commissioner, have called for renewed efforts to revive the Doha round of world trade negotiations. They are right, but so far world leaders, while paying lip-service to such sentiments, have often said and done things that encourage protectionism.

Brown has made some gaffes that suggest that he is not as enthusiastic an internationalist as he claims to be. Not so long ago he said that he wanted to create "British jobs for British workers." This remark has come to haunt him. A row has broken out at a French company's oil refinery in Britain where Italian workers have been brought in to do a construction job when British workers were available. British trade unionists have been demonstrating both at the plant and elsewhere demanding that Brown fulfill his promise. Industrial unrest could spread.

Brown has responded that his remarks had been misinterpreted and has condemned the demonstrators as irresponsible. The British government are not in a position to frustrate the decision of the contractors to bring in Italian workers as EU nationals can move freely and work in any EU country.

Brown has been reported as being furious that Royal Bank of Scotland, in which the government now has a 70 percent stake, was continuing to lend more abroad than it was lending in Britain, where the tightness of credit has been causing serious difficulties, especially for small and medium-size companies. Yet Brown rightly calls for a loosening of international lending. The lack of inter-bank lending on international markets has been a major factor in the worldwide credit crunch.

British problems are not unique. Other European countries are facing similar if not worse difficulties and protectionist pressures in Europe are increasing. In France there was a one-day strike by public-sector workers that caused widespread disruption and clashes. Throughout the EU the automotive industries have been demanding help and point to the U.S. support for its automotive industry. Governments are making concessions that will be difficult to square with EU rules against subsidies to so-called national champions.

In Russia there have been protest demonstrations in cities from Moscow to Vladivostok. There are reports of growing unrest in parts of China, where many factories reliant on exports have been forced to close.

European politicians are concerned by attempts in the U.S. Congress to insert "Buy American" provisions into President Barack Obama's mammoth stimulus package. The Treasury secretary's comments about Chinese manipulation of the yuan-dollar exchange rate have also been taken as foreshadowing increased trade friction between the United States and China.

The new U.S. administration has yet to come out clearly in favor of a successful conclusion to the Doha round and many fear that in negotiations the Americans will try to add provisions about labor practices that would make agreement with developing countries more difficult if not impossible. The Democrats with their ties to American unions are seen as less favorable to free trade than the Republicans. During the Great Depression, America's slide into protectionism exacerbated and lengthened the worldwide recession.

The recession has increased resentment against bankers, who are criticized even more stridently than the regulators and politicians. People ask why governments think it necessary to pump vast sums into propping up the banks, but are reluctant to provide help to industries and companies that are suffering not only from the credit crunch but the disastrous fall in the demand for good and services. But the banks provide the blood that circulates in the commercial and industrial body and have to be given priority help. But it behooves the bankers to behave with due propriety and restraint when they are dependent on the taxpayer.

Unfortunately some bankers are insensitive and do not seem to appreciate the need to curb their greed. Bonuses for bankers who have seen the price of shares in their institutions collapse seem obscene. The top bankers, who assert that high rewards are necessary to attract the best brains, ignore the fact that unemployment in financial services is growing. A reform is urgently needed of the systems of remuneration in financial services to stop rewarding excessive risk and to concentrate on long-term rather than short-term profitability.

Another effect of the recession has been to exacerbate feelings among the poorer and disadvantaged elements in our societies against those either more clever or fortunate who have escaped the worst effects of the recession. This resentment is being exploited by extremists on the left and the right who dislike free markets. As more and more people become unemployed these resentments will grow and fuel unrest.

There will also be increased questioning of the validity of the capitalist system. Winston Churchill said of parliamentary democracy that it "is the worst form of government except all those other forms that have been tried from time to time." Much the same can be said of capitalism. We have to make the best of it and try to curb the excesses that have developed within the system.

At this critical juncture it behooves politicians everywhere to do what they can to avoid protectionism and "beggar my neighbor" policies that would only aggravate and prolong the crisis. They must also watch what they say if they want to avoid accusations of hypocrisy. They should also do what they can to damp down resentments within society and between nationals of one country and another.

Hugh Cortazzi, a former British career diplomat, served as ambassador to Japan from 1980 to 1984.


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