Expert Speak Raisina Debates
Published on Oct 15, 2018
Protectionism versus patriotism

Recently US President Donald Trump said at the United Nations that “I reject globalism and I embrace patriotism.” It means a drastic change in the US policy because in the past decades, it relentlessly embraced and championed globalisation. It established global institutions to promote free trade and free movement of capital and wrote down the rules for trade and investment flows. At the International Monetary Fund (IMF), the US still has veto power.

Globalisation is based on the principle of global free movement of goods, services and people as well as capital. Free movement of people never became a reality and there has been huge resistance in developed countries against uncontrolled migration. But the main argument in favour has been that globalisation is economically efficient and would lead to higher levels of growth. But this did not happen and growth has become weaker while inequality of income and wealth have increased manifold.

The main reason of Trump’s ire, however, could be China’s enormous gains from globalisation. It has become the second most important economy in the world and has benefited from trade after its entry into the World Trade Organisation (WTO). It did not play by the rules of the game fairly, and kept giving big subsidies to its industry. It possessed many ‘state owned enterprises’ that controlled production and kept its yuan undervalued that gave it an advantage over competitors. US benefited from cheap imports from China as it kept the inflation rate down. But now Trump sees China as robbing US of jobs and globalisation is helping move manufacturing to China.

His recourse to protectionism has been widely criticised and according to Nobel Laureate Joseph Stiglitz, globally, manufacturing jobs are on the decline, simply because productivity growth has outpaced growth in demand. And even if manufacturing were to come back to the US, it will not create jobs. Because advanced technology, including robots, means that few jobs that will be created will require higher skills and will be placed at different locations than where jobs have been lost. Thus, according to Stiglitz, who wrote ‘Globalisation and its discontent’ 18 years ago, this approach of adopting protectionism is doomed to fail and will further increase discontent felt by those left behind.

According to Stiglitz, globalisation has led to setting of agendas, especially for Free Trade Agreements behind closed doors by large corporations and written at the expense of workers and ordinary citizens everywhere. One of the objectives of globalisation has been to weaken workers’ bargaining power because big multinational corporations wanted cheaper labour whichever way it is possible.

China has also realised the limits of globalisation and has begun to look inwards, focusing on the domestic economy. Its GDP growth has slowed down as it is experiencing cooling down of investment. It is facing trade war and an increase in tariffs from the US which has in September targeted $200 billion of Chinese exports. But with its $12 trillion economy and huge population, it no longer is dependent on exports as an instrument of growth. It is more interested in boosting domestic demand which seems to be flagging and is bad for the growth of the economy.

Recently, China has taken a bold step by injecting liquidity of $109.2 billion by cutting the reserve requirement ratios (RRR) of banks by 1 percentage point from 15 October. This will lower financial cost and spur growth in the world’s second biggest economy.

The reserve ratio cut is the fourth one this year by the People’s Bank of China. RRR is currently at 15.5 per cent for commercial bank lenders and 13.5 per cent for smaller banks. It is meant to speed up infrastructure projects by investment of billions of dollars in them. This will activate investment growth which has sunk to a record low. In the face of the negative impact of higher US tariffs on exports, the move seems to be in the right direction. The local governments’ debt problem of $2.5 trillion has not been addressed which may create stress in the future. But around $65.5 billion of cash injection will be directed to banks to repay domestic debt that is due in the coming weeks.

Just like in India, the yuan went down against the dollar by 10 per cent and stock market plummeted by 15 percent this year. The GDP growth has been lacklustre at 6.7 per cent.

India is also looking for an increase in investment in infrastructure and in boosting domestic demand. The recent RBI survey points to flagging consumer demand. In such a situation, India has to resuscitate domestic demand. It has also gone for selective protectionism to manage its widening current account deficit. But officially it remains a protagonist of globalisation as it has benefited a lot in the past decades by opening up the economy. But the export led growth and ‘make in India’ campaign have somehow not delivered over the last few years to the extent expected.  The global scenario of rising oil prices has led to stagnation of world’s economic growth at 3.7 per cent and a fall in global FDI inflows.

The investment demand has to be fuelled up and decline in interest rates would have been appropriate, but the RBI has kept the rates same as before. The need for higher investment in infrastructure and nurturing banks back to health are common problems in India and China. The debt problem in China is enormous. India’s NPA problem is also posing threat to further lending for investment by banks.

Whether there will be any reversal of globalisation when the world turns protectionist and the future of jobs are hard to predict. China wants to be the best in the world in AI, biotechnology and robotics by 2025. It also wants to increase the domestic content of core materials by 70 percent for its ‘Made in China 2025’. In such a situation, when China is making such giant strides on the basis of its superior technical manpower, strengthening human and infrastructural development in India is urgently required. Trump is right in focusing on the betterment of living conditions of Americans in his ‘America First’ slogan, but he is adopting the wrong path. But like China and the US, India should also focus on the domestic economy.

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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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