Is This the End of Globalization?

Paris is slamming the gates on Italian energy firms, US senators are railing against an Arab buyout of American ports, Brussels is slapping tariffs on Chinese shoes: across the world, politicians and voters are lashing out against unfettered free trade. Is globalisation under threat from a protectionist backlash?

As World Trade Organisation talks approach crunch-point, with the US and Europe under pressure to tear down the barriers that protect their agricultural markets from foreign competition, economists say the public's deepening suspicion of free trade puts the enormous potential benefits of globalisation at risk.

'I think it's something to be very concerned about,' says Stephen Roach, the chief economist at Morgan Stanley, citing the anti-China rhetoric in the US as an example of the protectionist clamour. 'There are more than 12 bills in the US Congress at the moment that would punish China. We're moving into a period of global distrust.'

China's unprecedented rise has also raised the hackles of European politicians. Trade Commissioner Peter Mandelson has announced he would impose tariffs on cheap shoe exports from the Eastern giant, accusing Beijing of unfairly supporting the industry.

And competitors closer to home - even within the 'single market' - are not exempt from European fury. The French government has backed the creation of a 'national champion' in the energy sector, through a merger between state-controlled Gaz de France, and Suez, apparently to protect the latter from a takeover by the Italian firm Enel, as part of a strategy of safeguarding 'strategic' economic sectors. To economists, the wails of the anti-globalisers, whether from rich governments or furious grassroots protesters, can seem short-sighted.

'You have to ask, in the world of economics, what impact does nationality actually have?' says Roger Bootle, economic adviser to Deloitte and Touche. 'It's just irrelevant. What matters here is what's produced where, and who earns the income.' He points to the competitive advantage - and the income - London has gained as a global financial centre by 'throwing open the gates' to foreign financial institutions. He understands, however, the powerful popular appeal of the nationalist, anti-globalising message.

'Protection remains a potent threat because, for large numbers of people adversely affected by international competition... it apparently offers an obvious gain - a no-brainer. Shutting out foreigners from "our" markets is obviously good for "us", although it is bad for "them",' he explained in his recent book, Money for Nothing.

'Trade is often viewed by the man in the street as a competition in which there can be only one winner, whose winnings are exactly balanced by the losses of the losers, or as economists would put it... a zero-sum game. But it isn't a zero-sum game. We all win. More than that, how much we can gain from trade depends on what they have to exchange and how much they can pay for what we have to exchange. In other words, we have a stake in their success.'

A recent book by two World Bank economists, Kym Anderson and Will Martin, found that if politicians used the current 'Doha round' of world trade negotiations to throw open their agricultural markets to competition from overseas, world GDP would be boosted by up to $300bn over the next decade.

History has shown that the most successful economies are those that open themselves to foreign competition. Another World Bank report, from 2001, compared the fortunes of open economies - including China and the Asian Tigers - with countries that have protected their home industries from foreign competition - in general, protectionism was a losing bet.

'Comparative advantage' - the compelling idea that everyone benefits if each country specialises in what it can do better, or more cheaply, than others - was developed by the British economist David Ricardo almost two centuries ago. But for a politician under pressure, the desire to find a foreign scapegoat for economic problems at home, and the clamour of those whose livelihood is being competed away, can outweigh any number of hefty economic textbooks.

Professor Joseph Stiglitz, Nobel prize-winning economist and author of Globalisation and its Discontents, says that is understandable. The benefits of globalisation are unevenly spread - and politicians haven't helped themselves by failing to manage the process.

'What is going on is a reflection of the fact that those who preached globalisation clearly didn't fully understand what was entailed; and in not understanding that, they oversold it, and they didn't fully prepare for the adverse effects.'

Even if the long-term benefits of liberalising trade are enormous, they are thinly spread - among shoppers who can buy cheaper imported goods, taxpayers who can stop bankrolling loss-making domestic industries, and the global population which is, as a whole, made wealthier. The short-term losers are concentrated, and often very noisy: and their pain can be considerable. Workers in the rich world are seeing their wages depressed - or their jobs under threat - from low-cost competition. As Stiglitz points out, that means that even if GDP figures look healthy, the average worker in rich countries may actually be getting worse off: and there are probably more losers than winners.

Middle-aged, highly trained textile workers in Italy are unlikely to be impressed by the idea that it's better for everyone if the Chinese take over much of the world's clothes production. Metal-bashers in America's rustbelt who are at risk of losing their jobs hardly care that propping up an unprofitable industry is expensive for taxpayers and consumers.

'We are reaching a situation where the downsides of globalisation are apparent to lots of people, and the upsides are less apparent - and people who previously regarded themselves as the winners are now losers,' agrees Paul Krugman, Princeton economist and New York Times columnist.

The answer, Stiglitz argues, is to have a strong social safety net, transferring resources from the winners to the losers from globalisation, to make sure everyone feels the benefits. Ironically, he says, conservative politicians on both sides of the Atlantic, who generally favour free trade, have actually hampered its progress, by fighting against such redistribution.

'The theory is that the winners compensate the losers. You need more progressive taxation. But social safety nets have actually been eroded,' he says. 'Politicians should have faced up to what globalisation actually means, been honest about it, and responded by making sure that most Americans, and most Europeans, are better off.' Otherwise, he says, democratic support for globalisation, already tenuous, will fall away.

'As an optimist, you might say the result will be that we get a globalisation that actually works,' he says. 'The pessimist would say that the forces that don't want more redistribution, would rather sacrifice globalisation than allow a larger role for the state.'

With crucial WTO talks looming, protectionist voices make the prospect of an ambitious outcome - which could transform the fortunes of some of the world's poorest countries - seem ever more distant. Mandelson set the tone last week, saying any reform of European agricultural support, 'must take account of broader societal and non-economic interests. And it must be paced to allow adjustment at a speed people can cope with.'

Many commentators believe protectionist pressures have only so far remained contained because the world economy has been growing strongly. If the US economy begins to slide, causing widespread job losses - and a potentially devastating impact on its trading partners - some fear America could turn in on itself, replicating the protectionist backlash which followed the stock market crash of 1929 and caused global trade to collapse, leading to the prolonged Great Depression of the 1930s. 'I think it's not going to be a huge problem, as long as the world is prosperous,' says Bootle. 'But what is the world going to be like if the bears prove to be right, and we get a significant US downturn, the dollar falls, and you have got a lot of pressure on the rest of the world?'

Krugman says pragmatism should prevail: for the US, he says, the long-term cost of throwing up trade barriers would be too high. 'Ideology aside, the thought is, what happens if you start down this road? The danger is not retaliation, but emulation: and then what happens to the whole system? I don't think the politicians are going to be dumb enough to repeat the mistakes of the 1930... but maybe I'm being naive.'

A brief history of protection

Protectionism has an illustrious history. Founding fathers Alexander Hamilton and George Washington used a tariff on foreign imports to nurture US industries. Britain, too, favoured high tariffs during its early economic development, and France under Napoleon banned almost all manufactured imports - a regime which stayed in force until the mid-nineteenth century.

In Britain the controversial Corn Laws, tariffs on imported grain, imposed in 1815, looked after British landowners at the expense of the poor, who saw the price of bread increase rapidly. After a militant campaign by the Manchester-based Anti-Corn Law league, Prime Minister Robert Peel eventually accepted that the tariffs had to be repealed - and split the Tory party down the middle. The 'Peelites' - the most notable of whom was William Gladstone, went on to form one wing of the Liberal party.

Protectionism reared its head on the global stage after the Wall Street crash of 1929, when US President Herbert Hoover used the notorious 'Smoot-Hawley' tariff to ramp up the cost of agricultural imports - later extending the tariffs to many other areas, and sparking what became known as the beggar-thy-neighbour policies which caused global trade to decline by two-thirds in just five years, and are widely seen as having exacerbated the Great Depression.

The 1930s proved to be the high water-mark of protectionism, and the prevailing wisdom since then has generally been that free trade is a win-win proposition.