The conventional wisdom is that a rise in protectionism may be coming, instigated by the new politics of Trump, Brexit and nationalism. There is also a commonly held prejudice that emerging markets, as highly export dependant, will bear a disproportionate burden from such a shift, sufficient perhaps to discourage investment flows. Yet emerging markets are much more likely to be major beneficiaries from a substantial shake up of global trade, and it is difficult to think of a credible scenario where the shock to them, overall, is more damaging than to the developed world.
Brexit & Trade
Much of the media and urban elite were shocked by Brexit, subscribing to a partial explanation of its significance. There is great uncertainty ahead for sure, as is normal when there is major structural change. Such uncertainty helps explain, but does not justify, commentators’ over-emphasis of worst-case scenarios in the name of prudence. Unfortunately, scare-mongering by seemingly impartial observers as a kind of lobbying and attempted opinion-forming is all too common across a wide range of issues. The result is a loss of balance.
Specifically, the picture of a more chauvinistic and isolationist Britain should be balanced by reflecting on our traditional and still strong traits of commercial good sense, tolerance and liberalism. It is rather perhaps our messy democratic practicality that has asserted itself in the vote to leave. The electorate got fed up with institutions across the channel which are dysfunctional, overseen by politicians and technocrats who are out of touch with the wishes of the electorate (the British electorate at least).
The over-emphasis on populism, a now derogatory term widely used to undermine the legitimacy of democratically generated decisions, has fed the impression that Brexit Britain will be at the lead of a protectionist trend. This is nonsense. Both economic logic and government rhetoric – albeit with the important and self-defeating (and one hopes temporary) exception of antagonism towards unfettered immigration – emphasises freer trade and more internationalism, not less. A Britain that can mould a trade policy suited to its comparative advantages and which ties its future to the high-growth, large economies of the future is not one which is about to instigate protectionism. Whereas Britain has launched itself on a new course, protectionism in the developed world is a reactionary force – a function of denial and an effort to sustain the unsustainable.
Trump – A return to US isolationism?
US politics and the new US leadership is different however. President Trump has so far walked away from the Trans-Pacific Partnership, wants to renegotiate the North American Free Trade Agreement, gone slow on any trade deal with the EU – preferring a new deal with the UK first – and may ignore the World Trade Organization.
Whilst both Trump’s America and Brexit Britain are a result of dissatisfaction with the status quo, it is a much more local affair in the US. Britain’s decision was driven by disillusion with the EU status quo, the US decision by the US status quo. Hence the protectionist threat from the US is real; as it is from the EU, for the same reason.
Structural Shifts Ahead
So a shake-up in global trade may be coming. If the US decides to ignore the WTO, others may follow. What does that mean for emerging markets?
An absolutely crucial piece of the puzzle is an understanding of the current distortions in the global trading system today. We do not live in a world of free trade, or even approximately free trade. We live in a world of more or less free trade in the bulk of goods markets. Services markets are much more protected – indeed even within the EU, the single market in services is something of a misnomer. But in two huge areas – textiles and particularly agriculture – there is absolutely massive distortion in favour of developed markets.
A break-up of this system could greatly benefit emerging markets, if they choose to seize the opportunity. It can be expected to unleash a wave of South-South trade and productivity growth. The last time the global trade system was seriously interrupted was during the Second World War. That led to the political unshackling of many developing countries. In Latin America, it stimulated the continent to industrialise. To say that emerging markets currently rely on trade with the developing world is true, but misses the opportunity to re-focus more on domestic demand as the main growth-driver (as China is already pursuing), and on South-South trade and investment. I also expect that emerging markets, much more used to external shocks than the developed world, will react faster.
By Jerome Booth