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Barriers and protectionism put peace at risk

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Barriers and protectionism put peace at risk

by Marco Magnani*

The modern globalization it has revealed excesses, limitations and distortions but also produced enormous benefits, ensuring prosperity, progress and a good degree of stability and peace for much of the world. For some time, however, globalization seems to have lost momentum. The retreat of globalization is metaphorically represented by that of the waters of the Panama Canal, the level of which has dropped due to drought, thus limiting the passage of ships in one of the key points of world trade.

The climate towards globalization has changed. In many countries it is popular support declined, and therefore also that of politics. The objectives of free circulation of goods and services, work and capital, people and ideas, technology and innovation that characterized modern globalization have entered into crisis. And there is a strong rethink underway about the benefits of globalization as the demand for protection grows in all areas.

Above all, a strong one is underway return to protectionism in the economic field. Local development needs, protection of domestic employment and defense of national industries tend to prevail over objectives of market opening, economic integration and competition. As a result, international trade and delocalization slow down, trade is regionalized and GVCs change their configuration, controls on capital movements and foreign direct investments increase, and regulation of the financial services sector increases. Part of economic theory also supports this trend and – with the theory of strategic trade – calls into question the principles of free trade enunciated by Smith and Ricardo.

Il protectionism it is often used by politicians to respond to an economic or social malaise. It is no coincidence that following the 2008 financial crisis, a period began characterized by tariff and non-tariff barriers, stagnation of multilateral trade agreements, increased controls on capital movements and restrictions on foreign direct investments.

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The return to protectionism: some cases

Il Chinese state capitalism displays many protectionist characteristics. Plan Made in China 2025, launched in May 2015, aims to further develop the domestic manufacturing sector in order to reduce China’s degree of dependence on foreign suppliers, especially in technology. And in 2020, with the launch of the “dual circulation” policy, Beijing confirmed its objective of making the economy less dependent on foreign countries and more focused on its domestic market.

The spirit of the slogan populist America First with which Trump unleashed a customs war during his presidency. And the Biden Administration has continued most of the protectionist measures introduced by its predecessor, albeit with more moderate tones and reducing tensions with allies. Particularly significant is the Build Back Better Act del 2021 That, also in reaction to the crisis produced by the pandemic, it contemplates total investments of around 1.2 trillion dollars and contains various protectionist elements. The plan is divided into three parts ‒ Rescue Plan, Jobs Plan, Families Plan – e includes investments in roads and bridges, ports and airports, water systems and electricity grids, public transport and rail services, broadband, electric vehicles and environmental protection. Also the strategic plan to facilitate the energy transition ‒ Inflation Reduction Act (IRA) of 2022 – contains strong protectionist elements. The hundreds of billions of dollars in tax breaks, subsidies and financing allocated are aimed at promoting the energy transition but also at reviving domestic manufacturing capabilities and reducing dependence on China for critical materials.

The recent decisions of the Indian government to block wheat exports (to counter internal inflation on food) and limit sugar inflation (to divert them to the production of ethanol). And with the plan Make in India, New Delhi aims to reduce the dependence of manufacturing sectors on foreign countries and allocates 10 billion dollars to create a domestic semiconductor industry. The EU is also trying to build a “strategic autonomy” and the temptation is growing to pursue what the Nobel Prize winner for economics Maurice Allais defined as «European preference”: defend European companies by the advance of American multinationals in digital and Chinese multinationals in manufacturing.

The return to protectionism is a fact and thenegative impact that this trend may have should not be underestimated. In fact, history teaches us that the risks go far beyond the economic cost. It is important to remember what happened after the Great Depression of 1929, when each country tried to get out of its own crisis at the expense of others, triggering a wave of protectionism. The introduction in 1930 of the Smoot-Hawley Tariff Act on the part of the USA it first led to a trade war between nations, with consequent general impoverishment, and subsequently to a world war.

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The hope is that history does not repeat itself. Because, as the French economist Frederic Bastiat argued “where goods do not passthe armies will pass.”

*Professor of International Economics at Luiss in Rome and Università Cattolica in Milan. Author of “The Great Disconnection. Fears and hopes after the excesses of globalization”, Bocconi University Press, by Marco Magnani, 260 pages, €22

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