The Local Syndrome

Calls for global negotiations to resolve the growing crisis have been heard for some time. But this time, it is the very real threat of the global economy teetering on the edge that brought about the first meeting of the Group of 20 nations. Pressed by French President Nicolas Sarkozy, US President George W. Bush, who has earned a reputation for being one of the most unilateralist of American leaders, hosted the meeting. For the first time, Washington formally acknowledged that the newly emerging economies of China, India, Brazil and others deserve a seat at the high table. In an unprecedented display of remorse, Treasury Secretary Hank Paulson admitted the US had “in many ways humiliated ourselves as a nation with some of the problems that have taken place here”. Staring at the prospect of perhaps a trillion-dollar deficit next year, Washington has belatedly come to the realisation that it does need the help of others.

Agreement on previous ‘no-go’ issues such as the supervision of banks and credit-rating agencies, complex derivative markets and scrutiny of executive pay are indicative of the US’s weaker position. While accepting America’s insistence on the primary role of the free markets, Europeans succeeded in having their proposal for a “college of supervisors” to monitor global banks adopted. The leaders also promised not to adopt any new protectionist measures and pledged a fresh effort to revive the Doha round of trade talks.

For all the compromises it entails, the issuance of the five-page communiqué was perhaps much easier than what awaits leaders back home. Many countries have been considering different policies to prevent a recession from turning into a depression, but these may well set the countries in question on a protectionist path. President-elect Barack Obama’s call for bailout of the three leading US automobile companies amounts to an industrial policy in support of a mismanaged industry. What is presented as policy to prevent massive job loss in the midst of sharply rising unemployment can be seen by competitors as an unfair subsidy, triggering reactive calls for trade barriers and protection.

Already, the US government’s plan to offer soft loans worth $25 billion to promote the development of more fuel-efficient vehicles has led Europe’s car makers to turn to the European Commission for help. If the government extends bailouts from bank and financial institutions affecting the system to the industrial sector, how can it resist demands from other ailing industries? Taxpayers’ money spent on bailing out private companies will distort trade, as government-aided industry would be compelled to end its efficient outsourcing operations in favour of spurring domestic job growth. If state subsidies ends up hurting supply chain mechanisms, the long-term impact on the world economy would be severe; and in government-funded businesses, efficiency and free trade principles would be sacrificed at the altar of national economic interest.

In fact, nationalism beyond American shores may also be receiving a boost from the current crisis. Sarkozy’s proposal to create a European sovereign wealth fund to prevent foreign state-owned funds from taking over major distressed European companies flies in the face of official acceptance of free market principles. This nationalist trend is, of course, not new. Citing national security concerns, the US scuttled the China National Offshore Oil Company’s (CNOOC) bid to purchase Unocal in 2005 and Dubai Ports World’s 2006 attempt to acquire the management of seven US ports. If Europeans, currently lukewarm to Sarkozy’s proposal, come to support the measure, it could end up choking off likely sources of credit in an already credit-starved world.

At a time when the world is increasingly turning to countries with huge foreign reserves, such as China and Saudi Arabia, to shore up the International Monetary Fund in its effort to save smaller economies, exclusionary policies towards them would send precisely the wrong signal. At a recent conference in Washington, a senior Chinese official recalled the US’s rebuff to CNOOC, noting that the move not only denied Unocal shareholders a chance to earn a large premium, but “made China feel as if the dollar it was holding was dirty and could not be used to buy an American company”. China, he added, is sitting on a $2-trillion reserve, but is told, “You can earn dollars but can’t spend it on what you wish.”

For all the talk of a global solution to this crisis, and despite the G-20’s historic communiqué about “working together”, the thinking about solutions remains resolutely local.