Global Trade: The Road to Ruin

In Shanghai not long ago, I took a walk from my hotel along Nanjing Road to the Bund, the promenade on the banks of the Huangpu where visitors from China’s hinterland gather to gaze across the river, awestruck, at the ultramodern skyscrapers of Pudong that have transformed the city’s skyline in not much more than a decade. It wasn’t what was on the far side, though, that got my attention: it was the traffic on the river itself, great container ships, chuffing lighters, bulk carriers, every sort of waterborne vessel you could imagine carrying every imaginable cargo, churning up the waters.

It’s not what one is used to in the West. In the U.S. and Europe, we have prettified our rivers, turning city waterfronts into places where genteel folk ride their bikes or snack in the open air. But in Asia — not just in Shanghai, but along the Chao Phraya in Bangkok, or in Hong Kong’s harbor — waterways are not pretty at all. They are busy places of work and commerce, the arteries of trade, that age-old process of exchange that, more than anything else, has lifted millions of Asians out of poverty in two generations. (See pictures of China on the wild side.)

At least, they were. The economic crisis has hit world trade hard. Ports throughout the world are dramatically less busy than they were just a few months ago; air traffic is way down. Exports from Japan were almost 50% less in February compared with the same month in 2008; China’s exports were down 26% in February. The World Trade Organization is predicting global trade will shrink by 9% this year, the steepest annual decline since World War II. This contraction is not only deep, it is also a latter-day rarity: global trade has increased continuously year after year since 1982. (Read “The Threat of a Global Trade War.”)

The main culprits are not hard to divine. As households in the rich world, battered by a collapse in the values of their assets, start saving again, their appetite for new cars and consumer electronics has diminished. And as banks try to rebuild their shattered balance sheets, capital that would once have been used to finance trade is staying in their vaults.

But if reduced demand and financial flows explain the immediate cause of the downturn in trade, a different — and potentially more damaging — specter looms: the return of protectionism. In a recent report, the World Bank found that although the G-20 nations pledged themselves to avoid protectionist measures when they met in Washington last November, no fewer than 17 of them have, since then, “implemented measures whose effect is to restrict trade at the expense of other countries.”

The bank listed some of those measures: Russia has raised tariffs on used cars, Argentina imposed new licensing arrangements for imports, China banned Irish pork, India banned Chinese toys. No fewer than 13 countries have granted subsidies to various parts of the automobile industry. And the bank didn’t mention the nasty spat that has broken out between the U.S and Mexico; the U.S. has stopped a program that allowed Mexican trucks on American roads, and Mexico has retaliated with tariff increases. Said World Bank president Robert Zoellick: “Leaders must not heed the siren song of protectionist fixes. Economic isolationism can lead to a negative spiral of events such as those we saw in the 1930s, which made a bad situation much, much worse.”

Zoellick got it just about right. Economic historians will long argue about the relative impact of trade restrictions — led by the U.S. Smoot-Hawley tariffs of 1930 — on the scale of the Great Depression. The U.S. economy was much less integrated into a global economic system then than it is now. But given the retaliation from America’s trading partners after the new tariffs were applied, few would argue with Zoellick’s assessment that the contraction of trade in the 1930s made the long downturn worse than it needed to be. “Protectionism,” British Prime Minister Gordon Brown told TIME recently, “is the road to ruin.”

See pictures of the global financial crisis.

Read TIME’s special report on The G-20.

Which raises the question, one that trade economists have to answer every 10 years or so: If protectionism is so ruinous, why does everyone reach for it in tough times? To answer that, you have to go back to why trade is good for you. The idea that an exchange of what you have for what I have makes both of us better off must be as old as the first moment anyone swapped cowrie shells for some cooked fish. Organized trade is ancient: silk did not get to Rome because the Romans figured out sericulture; someone imported it from China. But it took until 1817, and the work of the British political economist David Ricardo, for anyone to cloak a theory around something that humans had been doing since time immemorial. Ricardo showed that if nations concentrate on what they do best — those things in which they have a comparative advantage — and trade for the rest, their welfare will increase. The magic of trade is that it encourages economic specialization. If the fruits of that specialization can be freely exchanged, everyone benefits. (Read “Protectionism on the Rise in Europe?”)

“Everyone,” of course, is an aggregate. One difficulty with trade, and the reason that it becomes controversial at times of economic hardship, is that while its benefits are widely spread and difficult to measure, its costs are concentrated and often easy to see. The gains manifest themselves, for example, in low prices at the supermarket. But consumers are many, and they are not politically organized. By contrast, those who can be identified as losing out because of trade — like automobile workers who have lost their jobs to imports — are relatively few and are easy to marshal into political communities with clear messages.

There are massive ironies in the “protection” of those damaged by imports. If you listen to many politicians, especially American ones, you would think that imports are bad, a signifier of economic failure. Trade only “works” if a country runs a surplus. (A logical impossibility when extended to all countries, but never mind.) Free-traders scream: No! It is imports, not exports, that are the whole point of trade; we trade precisely so we can enjoy those goods in whose production others have a comparative advantage. But that message is not easy to get across in hard times.

There is a second difficulty in making the case for trade during downturns. Trade is a global phenomenon; politics is national. When unemployment lines lengthen, politicians understandably feel that they have to respond to the immediate needs of their constituents, not those (to adapt an infamous phrase of Neville Chamberlain’s) in a faraway country of which they know little.

Yet it is precisely that mind-set, however natural it may be, that most needs challenging. It does not take any simplistic endorsement of the benefits of economic globalization to understand that we live in an interconnected world. It isn’t just goods that move around the planet. The flow of people from one nation to another — people with all their myriad hopes and resentments — has been taking place on a scale never seen before. Prosperity does not solve everything, God knows, but the world will be a safer place if those who have recently escaped poverty are not now told by those who have never known it that they have to accept less than they dreamed of. “We cannot deny people their aspirations” said Nandan Nilekani, co-chairman of Indian IT giant Infosys Technologies, in an interview by the New York Times’s Thomas Friedman at the New York Public Library this week. Do so, and those denied aspirations will mutate into something much more dangerous.

As Brown says, the key issues that the world faces today cannot be dealt with by rich nations acting alone. That is as true of the regulation of global financial markets as it is of the relief of poverty. Climate change cannot be tackled by any one nation, or any group of nations, however rich and powerful they may be; any solution that does not include within its policy parameters India and China is worthless. (Read TIME’s special report on The G-20, including an interview with Gordon Brown.)

Poverty, climate change and economic dislocation are all issues that, if not handled properly, could engender real political instability. Trade, just by virtue of its existence, makes international cooperation concrete. With all trade’s potential to improve lives — so richly realized on those Asian riverbanks — it makes our world a safer and a better place. Now is not the time to turn our backs on it.

See pictures of the global financial crisis.

See pictures of the top 10 scared traders.