After the financial crisis of 2008, the world changed. Governments now pose new questions about how stability should be maintained in an economy. What type of financial stimuli should be incorporated into the economy and which will prove most effective? Should governments continue to bail out banks that are deemed “too big to fail”? Should the banking system be changed completely? There are no universal answers to these questions as they vary from country to country. It would be ineffective to embrace solutions categorically.
Currently, the world is experiencing a rise in economic nationalism. There is an overwhelming urge to keep capital and jobs in their home countries. This, however, turns the economic crisis at hand into one of a political nature, threatening world economies with a large-scale recession due to protectionist policies.
Globalized Economy Under Threat
Many of the world’s leaders are pushing towards economic nationalism and using the same arguments in its defense – justifying it commercially and politically.
The commercial justification is that banks, when in trouble, should pull out of the international economy and retreat to their home countries. After crises, banks tend to decrease foreign reserves – a pattern that governments should consider counteracting. Financial intermediaries take safe haven in their home countries as they better understand the risks and may benefit from scale. At the political level, it is reasonable, and even expected, for politicians to spend the majority of tax-payers’ money within the home country.
These arguments for economic nationalism disregard the benefits of a global economy. With such nationalist sentiments picking up momentum, the link binding different economies is under great strain. For the first time since 1982, world trade may be in a contractionary phase. Protectionist policies threaten the globalized economy, which the vast majority of economists agree is best for economic growth when compared to nationalist strategies.
Old policy approaches, now making a comeback, are rooted in trade remedies that aim to save or keep domestic jobs. This approach is inherently unilateral and, many times, backfires as it disrupts established supply chains. However, an open trade regime is not enough either. Moving away from such protectionist policies, a country should be making strides towards horizontal policy measures. The most notable being investment in education, technological transfer and protection of intellectual property. The combination of these with an open trade regime would allow for prosperity within the country as well as its global partners.
Brexit: Greatest Act of Economic Nationalism in British History
The Brexit referendum illustrated protectionism as a political strategy. For example, the few that are affected negatively by trade and immigration policies seem to care substantially more than the millions that go unaffected. Politicians intentionally play on the emotions of such individuals to achieve their optimal outcome. Regardless of this vote, many British politicians have openly stated the dire need for Britain to maintain a positive relationship with the European Union. It seems every time a British politician or member of government says something along the lines of a protectionist policy, the British Pound drops in value; the world is betting against Britain, and by extension, economic nationalism. Many politicians have commended Britain for arranging trade agreements with Australia and the US, but push for more focus on their existing partners within the European Union.
Trump’s Vendetta Against Free Trade
Recently the world has been the audience for US President Donald Trump’s vocal views against free trade agreements, all rooted in protectionism and nationalism. Trump has declared his withdrawal from the Trans-Pacific Partnership (TPP) as well as his pledge to renegotiate the terms of NAFTA. Apparently, these moves will be “great for the American worker”. As a global power, the US could spark a domino effect with such trade policies. Protectionism in America, the hub for global trading, could give other nations a reason to slap on tariffs, having a large-scale impact on the global trading system.
Trump’s opposition to free trade is a great political strategy at the expense of economic theory as well as societal welfare. At face value, economic nationalism keeps domestic jobs at home. But upon deeper investigation, it restricts consumer choices, raises prices and shelters inefficient firms. Trump is not the first politician to use protectionist policies to gain votes, and he certainly will not be the last.
This rise of economic nationalism needs to be addressed and counteracted. The consequences of such policies are much greater than the benefits only seen by a small part of society. The benefits of trade are dispersed throughout the economy and are only appreciated over time. Workers who are affected by such trade policies need to be helped through investment in education instead of economic nationalism.
Each nation’s plan to address these concerns should include open markets, even if foreigners benefit from such. With the move towards a global economy, the distinction between domestic and foreign is increasingly blurred and should not maintain such a footing in policy. The international economic system desperately needs a country in a leadership role. The US is in a position to be this guarantor. It needs to step up and embrace globalization instead of falling back towards economic nationalism and protectionism.