If borders close….

Debates on trade protectionism and de-globalization have been on since the global economic meltdown in 2007. At a time when China, who operated a relatively closed economy for decades, is tending towards being pro-globalization the United States that has previously been a major proponent of free trade is tending towards implementing “fair” trade policies which emphasizes trade benefits for America.

Given varying degrees of country comparative advantages and being in different phases of industrialization as well as having different capital and labour intensities, the rationale for global interdependence and integration couldn’t be any stronger. However, in an environment of heightened ambiguity with a sluggish global economy, geopolitical volatility, migration crisis and acts of terror, concerns are being raised about the current state of the world and an increasing number of countries seeking to protect their own interests are gradually tending towards protectionism, reneging on multi-lateral trade negotiations. With increasing degrees of negative mood trends globally, everyone seems to be a potential enemy giving rise to increasing clamour for de-globalization.

De-globalization is the process of diminishing global interdependence and integration. It is the breakdown of the global system into independent individual constituents thus making it difficult to achieve equilibrium by re-distributing excess demand and supply through the global system of trade and capital. A review of President Trump’s proposed investment in infrastructure which is expected to translate into a stronger dollar would have been a plus for exporters to the country but for his protectionist ideologies which would make trading with the US a little trickier. A stronger dollar also translates to a higher debt burden on countries like Nigeria with dollar-denominated debts relative to falls in their export revenues with increasing trade barriers. This increases the risk of global debt defaults.

Globalization also came with a breakdown of democracy in Latin America, Chile and more recently Poland and Hungary. Social disintegration; spread of diseases like Ebola and HIV/AIDS; increasing threats to security with the targets now inclusive of minors; deterioration of environment and rise of self-interest among countries are all associated with Globalization. The big question therefore remains “Can Economic Globalization be more inclusive, mutually beneficial and equitable or do we embrace De-globalization as the new world order?’.

Emerging economies can take a hard look at themselves to see how well they’d fare if protectionism became the “new world order”. As Warren Buffet says, when the tide comes out you find out who is swimming naked. This is a wake-up call to developing countries whose governments should focus more on what can be done internally rather than hang on to the façade that globalization will solve all its problems. Though global interaction is necessary to balance localized excesses in demand and/or supply, our approach should not be “incautiously open” to the global market but “smart protectionism” by being “equally open and armed” which is the stance countries like the United States has taken. Developing countries must take a stance of being open to cross-border trading and investment while being equally protective at home. This involves stabilizing the financial markets in the short-term by deploying all fiscal and monetary policy tools to attract both greenfield and brownfield foreign direct investment to augment domestic capital as well as developing a long-term economic model that is sustainable through structural reforms.

It will be erroneous to understate the clap-back for de-globalization by the United States and Great Britain as they are not just any two countries but have been guarantors of the international order since World War II. So when these powerful two take a protectionist stand, the world must be at alert and while we are working at improving the state of the world we should also be prepared for the possibility of closed borders.