Barely hanging on

harold-lloydThe summit of G7 finance ministers here in Rome has spoken out rather strongly against the protectionism. The new US Treasury Secretary has also downplayed the ‘Buy American’ clause that is in the stimulus package that finally got approved by the US Senate and stated that “All countries need to sustain a commitment to open trade and investment policies”. Roger that.

However, following the news one would get a feeling of suffering from some kind of a double vision. Because there IS the ‘Buy American’ clause in the US stimulus package. Because while the French and UK finance ministers nod their heads in approval in Rome, Sarkozy calls for the French car makers to repatriate their manufacturing plants from Czech Republic and Gordon Brown is being pressed ever harder to deliver upon his “British jobs for British workers” pledge, which was one of the things that got him elected. The common open European market and the principle of the free movement of labour seems to be hanging on by fingertips.

Paul Krugman has made a point that there actually is an economic case for protectionism and, though it does take an eye off the larger ball, it is going to be very alluring in short term for a great number of people. I too think that it is extremely important to be intellectually honest about this, as the pressure to go protectionist is only going to increase in richer countries who are coughing up huge amounts in stimulus packages that is essentially taxpayers’ money. It is likely that the industrial nations will try to avoid sparking trade wars amongst themselves as this is in all likelihood a zero-sum game in terms of potential benefits and would only stand to unravel decades worth of negotiations which would be extremely painful to put together again once the storm has passed.

However, concerning the dealing with rest of the world is a somewhat different set of propositions. The US and big EU nations have little immediate interest for bailing out the economies and financial systems of smaller nations – and the downside of cutting them out of the deal is a lot smaller. At the same time – if they DON’T do it (by virtue of limiting the benefits of stimulus to their own economy) it spells the end of the principle of single Europe. And indeed, the “new Europe” is crying foul – protectionism was something you were supposed to do to Africa. Hey, we’ve got people here!

So it is a real conundrum and politicians are caught between the rock and a hard place.

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