Protectionism Threatens Emerging Engine of Growth

Imagine the American consumer as a fatigued soldier, having guarded global economic growth throughout the past decade against all attacks. Yet now enemies threaten from every direction: inflation, indebtedness, property bubbles, energy prices, terrorism.

Mercifully, the cavalry is on the way to provide relief -- but it isn't coming from the rich countries of Western Europe. The 12 nations using the euro grew just 0.3% in 2005's final quarter. Germany, the world's third-largest national economy, remained the Godot of global demand: We're still waiting. The savior isn't even a resurgent Japan, whose imports rose more than 10% last year to $500 billion.

The source instead is emerging markets, where consumers from Beijing to Bucharest bought like never before in 2005. They accounted for some 40% of global imports, or $4 trillion; that share is four times as large as it was in 1990, when globalization was taking hold. Imports to developing Asia last year grew 15% to $2.1 trillion, with China's share of that amount at 30% and growing.

"The baton of global consumption is being passed from the U.S. consumer base to the millions of consumers in developing nations," says Joseph Quinlan, chief market strategist at Bank of America.

And the trend is accelerating. The Spanish retailer Zara just joined a long line of other brands, including Diesel and Gap, to announce the opening of stores in China now that Beijing will allow them to do so without joint ventures, part of its obligations to the World Trade Organization.

There's only one potential hitch.

Protectionist forces in Congress and Europe could stymie this most promising new aspect of the global economy just as it is accelerating. The U.S. Treasury continues to talk of labeling China a currency manipulator in April, and if it does so pending legislation would slap a 27.5% tariff on all Chinese goods. The European Union is considering double-digit antidumping tariffs on Chinese and Vietnamese shoes. Lawmakers thus far have focused primarily on the emerging markets' threat to manufacturing jobs and have largely missed this rising-demand story that is feeding corporate profits and jobs and providing a global fail-safe.

A retreat by U.S. consumers may seem less likely following last week's report of extraordinarily robust retail sales for January, raising hopes of 5% U.S. economic growth in this year's first quarter. But exhaustion seems inevitable.

America's near-zero savings rate, a jittery property market, and threats to employer-sponsored health and pension programs are just a few of the forces testing the U.S. consumer's will. And the world is in trouble if Americans close their wallets before enough others around the world open theirs.

International Monetary Fund data show that developing nations' share of global imports already had reached a record 40.2% by August and averaged 38.3% in the first nine months of last year. That demonstrates a continuing acceleration from a 32% average in the 1990s and 29% in the 1980s.

Mr. Quinlan considers the IMF figures to be "the tip of the iceberg" and expects consumer spending in China, Brazil, Poland, Turkey and other developing countries will increasingly drive global consumption trends and, while they're at it, the growth of many U.S. companies.

One-third of U.S. corporations' foreign-affiliate income, which is a proxy for their foreign earnings, came from emerging markets in the first three quarters of last year, a record high and up significantly from 25% in 2002. Many American companies, from General Motors and Boeing to UPS and PepsiCo, are betting their future health on emerging-markets growth. So trade sanctions, which would cut into emerging-market growth and jobs, would come back to bite multinationals.

"It would be self-defeating for politicians to turn protectionist now," says Thomas Mayer, chief European economist of Deutsche Bank. He says emerging markets provide the best hope for the moment because Western Europeans "still lack confidence in the future" and don't have political leaders willing to make the tough decisions to turn their economies around.

Late last week, the European Parliament watered down legislation for liberalizing the European Union's services sector -- which amounts to two-thirds of the bloc's economy -- to the point that national barriers will remain in place.

On the other hand, emerging Europe, including Russia, is one of the unsung global-demand stories. The region in 2005 imported some 15% more than China, an estimated $716 billion. Imports to the region have grown fivefold since the Berlin Wall fell in 1989.

Oil is of course a big part of consumption growth, too, bolstering demand from Russia to Latin America to the Middle East. The latter two have seen imports rise about 15% and 19%, respectively, in the first nine months of 2005.

Yet something larger is at work: globalization's new era. The first stage began with the collapse of the Soviet Union and German unification in 1990. That was followed by Eastern Europe opening for business, Latin America embarking on privatization, India emerging from its 1991 financial crisis and China gaining traction after its 1980s opening.

The second decade of globalization is characterized by the maturing of places like China, India and Eastern Europe and their integration in the global economy. The Shanghai factory worker and the Bratislava machinist have increased their earnings and want to buy. The Chinese and Eastern Europeans love brands and have deepening pockets.

There is a threat in all this, of course, made apparent in last week's news that Chinese auto companies in 2005 had for the first time become net exporters. Growing domestic demand provided the base on which those car makers built.

Emerging markets aren't just breeding consumers but also companies that will move up the global food chain to challenge U.S. and European competitors. As they flex their muscles, they will make inroads in developed markets, challenge profit margins and in some cases create excess supply.

Congress can do little to stop the rise of such competitors, but an untimely trade war would slow the shift to emerging-market demand that could help rebalance the world economy. It would be sad irony if the U.S. declared trade war on China just as companies from General Motors to Boeing are making it their biggest growth market and McDonald's is opening Beijing drive-through restaurants.

"Bad trade policy could upset this emerging consumer class as a powerful consumption force just when we need them," Mr. Quinlan says.