Economic Protectionism May Prolong Shortages 

From the United States to Germany, developed countries are scrambling to source energy supplies and satisfy a booming consumer demand for goods. 

Supply chains disrupted by the COVID-19 pandemic are straining to cope and factories are unable to meet the surge in demand from consumers, who are spending far more than normal, a consequence of governments pumping $10 trillion collectively into their economies, say business analysts.

Shortages in Britain have made headlines with shoppers facing empty food shelves, with fruits and vegetables especially in short supply. Supermarket bosses warned Wednesday they might have to ration meat to prevent panic buying, particularly in the run-up to Christmas. 

 

Britain’s supply challenges have been intensified by its departure from the European Union, its main trading partner. But European neighbors, as well as the United States, are also reporting shortages of clothing and electronic goods. Manufacturers say they are finding it hard to source microchips due to factory shutdowns in Asia. 

Politicians have sought to reassure voters that things will return to normal soon and that shortages are transitory.

But are they? 

 

Some economists and trade analysts fear the developed world may be entering a new era of scarcity partly because of climate action, which will be costly and slow economic growth, and because of a growing trend toward economic protectionism. 

 

While few doubt that carbon reduction in economies is essential, if an existential climate disaster is to be averted, a rise in the imposition of tariffs and quotas and government regulations, aimed at restricting imports, has free market advocates and economists worried. 

Shortage economy 

 

They say turning away from globalization and free trade will slow economic growth, lead to scarcity, reduce productivity, and make the world poorer. Britain’s influential Economist magazine this week warned, “Around the world, economic nationalism is contributing to the shortage economy.” 

 

The magazine’s editors say, “Trade policy is no longer being written with economic efficiency in mind.” They pointed to the recent decision by U.S. President Joe Biden to keep in place tariffs from the prior administration of President Donald Trump, which average around 19%, on Chinese goods. 

 

Free trade opponents welcome the trend, arguing globalization results in job losses in developing countries, leads to increasing and unfair economic disparities and income inequalities, results in the exploitation and underpayment of workers and roils local communities. 

 

Debate aside on the benefits or drawbacks of globalization, economic protectionism has been increasing in recent years. Data compiled by the London-based Center for Economic Policy Research suggests that more than 50% of exports from G-20 countries are subject to trade measures, up from 20% in 2009. 

 

Global cross-border investment has declined dramatically during the past two pandemic years, but even before the emergence of the coronavirus, it was falling according to figures published by the Organization for Economic Cooperation and Development, a Paris-based intergovernmental body with 38 member states. 

 

Since 2015 foreign direct investment by companies has fallen by half relative to world GDP, according to the OECD. 

 

Governments are increasingly showing a reluctance to sign new free trade deals and instead have been talking up the need to boost manufacturing capacity and the economic security of their countries. 

 

Analysts and business leaders also say geopolitical rivalry, where nations see trade as a zero-sum game, meaning there have to be winners and losers, is also playing an increasing role in the policy-making and economic thinking of governments. 

 

Last week, a group of CEOs from some of the world’s biggest companies, brought together by the World Economic Forum, WEF, an independent international organization, called for greater global trade cooperation. In a joint statement, the business leaders drawn from 17 countries highlighted the potential of trade and investment to speed the global economic recovery from the pandemic. 

 

“We believe trade and investment support human development and that global recovery can be built upon a trade recovery. Governments must creatively re-engage on trade reform and refrain from protectionism,” they said. 

And the CEOs added, “Through jointly upholding environmental and social standards, trade cooperation should prevent a race to the bottom and avoid harmful distortions to markets for goods and services. Trade cooperation can improve outcomes for underrepresented members of society, including women and minorities.” 

 

Last month, Biden played down the prospects of a post-Brexit free trade deal between the United States and Britain during bilateral talks with British Prime Minister Boris Johnson at the White House.

Biden said he would discuss the issue “a little bit” with Johnson, who has been eager to strike an agreement with the U.S. in the wake of Britain’s exit from the EU. 

Later, Johnson told British reporters that a U.S.-UK trade deal was “just not a priority” for the Biden administration. 

 

The U.S. is not alone in running shy of new free trade deals and focusing on national self-reliance and boosting manufacturing capacity. When first elected in 2014, India’s prime minister, Narendra Modi, raised the prospect of implementing wide-ranging economic reforms and opening his country much more to free trade. 

Some incremental reforms were introduced, but soon after entering office Modi put a pause on trade deals and adopted policies focused on India supplying the goods and services it needs from within the country, rather than getting them from abroad. 

 

There has been some tempering of Modi’s self-reliance policy since, but his government has been highly cautious in discussing regional trade deals, say analysts.

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