The storm of new protectionism: what lies behind it?


Digital & Data Governance

Picture of Daniel Dăianu
Daniel Dăianu

President of the Romanian Fiscal Council, former member of the European Parliament, former Romanian finance minister and Trustee of Friends of Europe

He bears sole responsibility for the views expressed in this text.In the United States, views advocating a ‘strategic’ approach to international trade were mostly marginal in public debate for decades. But with the Trump administration there is increasing talk in Washington, DC of bilateral agreements and using tariffs to protect industries. American companies are prodded to move operations back home; a reversal of finance regulation and supervision reforms is foreseen.

To consider this radical change as only a temporary anomaly would be simplistic. Deep currents have been present for a long time. Within European Union member states similar forces and national concerns are on the rise too – witness Brexit – but EU rules bind countries into a free trade order. Immigration policies are being re-examined, both in the US and in Europe.

But where does this new protectionism come from? Why do ‘sirens’ of protectionism and nationalism ring in the developed world? I believe that we can look to two main explanatory areas: economics and security.

In terms of economics, there is the decline of America’s global power status, threats to the economic pre-eminence of the Western world, new technologies replacing jobs, the financial crisis, and bad corporate practices such as tax-dodging.

New protectionism is also a reaction to unmanaged globalisation and the perils it has entailed. One can argue that if public policies had been more attentive to the needs of individuals and companies that lose out from global competition, there would not be so much social stress at the moment.

One should also remember that countries have used protectionism and industrial policies to construct competitive advantages and alter the balance of power in the past. That has been the case with the power struggles between the US and the UK; between Germany and the UK; between Japan and the West. The rise of other Asian economies can be judged through such lenses.

New protectionism is also a reaction to unmanaged globalisation and the perils it has entailed

When it comes to security, the role of the state as a guardian of public interest is becoming even more prominent on the public agenda. Terrorism, unconventional threats (cyber warfare, hybrid wars), fears for the future and uncertainty are putting pressure on national governments. New security measures are proliferating. The refugee/migrant crisis has undermined the Schengen passport-free zone. But isolationism, protectionism and nationalism may act as a boomerang; they may only serve to make things worse.

Another issue that needs to be addressed is the potential trade-off between security and openness.

Authoritarian temptations and inward-looking proclivities come up in liberal democracies during hard times. These propensities match the way states act in times of heightened tensions and war (creating a ‘war economy’ or ‘war society’ syndrome). But a trade-off is possible. One can link protection/security to openness (economic freedom) and imagine levels of citizens’ comfort in terms of these two public goods.

Substitution of protection/security measures with economic openness has its limits, because these public goods are not independent of each other. Protectionist measures and restrictions distort an open society if they go too far; total economic or societal openness, with no rules or protections, may cause intense social strife. In very good times people prefer more openness. When times get worse, a more inward-looking society emerges: this may involve protectionism and restrictive measures.

How decisions are made regarding public goods, and who make those decisions, brings politics into the spotlight. People have varying and changeable opinions; it may be that the way people value protectionism versus openness varies over time, and what is abnormal or unpalatable today may be acceptable at another time. The problem is that  protective measures trigger similar responses from partners that may outlast these changes in opinions – and trade wars are likely to damage all parties.

Perhaps there is an optimal degree of openness that changes according to circumstances, to long cycles of upswings and downswings in the world economy. But even in this case a complete breakdown of an international rule-based system based and multilateral agreements would be disastrous. (It is worth recalling that the globalism of the 19th century was also followed by commercial and military conflicts.)

If those who are on the losing side of global economy are not given a fair chance and continue to feel excluded, tensions will rise and conflicts will intensify

The world seems to be bumping into fragmentation: there is an increasingly multi-polar and uncertain reality. Many developed states feel threatened by ascending economic powers and seek to protect themselves via various measures. Terrorism and other new threats fuel these inward-looking tendencies.

If those who are on the losing side of global economy are not given a fair chance and continue to feel excluded, tensions will rise and conflicts will intensify. Interethnic and religious conflicts add to the social and political strain; the new (4th) Industrial Revolution does not ease efforts to adapt to shocks.

New protectionism will probably usher in a prolonged interregnum in global trade, with a corrosion of international, global institutional arrangements and increased instability. This is worrisome for those who believe in the virtues of multilateralism and rules. Europeans know from their own history where unrestrained rivalries may lead to.

But the big question is what the new economic order will be during this interregnum. Will multilateralism survive as a basic principle? This is a fundamental question. It seems that we are in a transition towards a new international regime and it is vital that big conflicts and serious damage be avoided.

The EU, which is a public good itself, has to be protected despite threats to multilateral systems. As former EU foreign policy chief Javier Solana put it, the EU may be the world’s best line of defence against what threatens the multilateral order.

But the EU needs reforms that address its internal divides and prevent their deepening. The eurozone needs completion. Europe needs security arrangements that are adapted to a new reality. EU member states will have to pay more for their own defence. And the EU and the US need to work together to prevent major conflicts in the world.

New protectionism won’t go away quickly or easily: it is up to multilateral organisations, such as the EU, to take these necessary steps to weather the storm.

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