The Economies Most at Risk from Protectionism

One of the most important trends impacting today’s global economy is the rise in support for political parties and leaders that are calling for protectionist measures to be implemented in their countries in order to defend local industries and to prevent jobs from moving outside of their countries’ borders.  In previous years, protectionist sentiment was highest in smaller economies that have little impact on the wider global economy.  However, we have witnessed a surge in support for protectionism in many of the world’s leading economies in recent years, including countries such as the United States, Germany and the United Kingdom.  As these are some of the world’s leading markets for exporters and investors, the new rise in support for protectionism in such economies has the potential to cause serious disruptions to international trade and investment.  Moreover, many countries face particularly severe threats from this rising protectionism, particularly those countries that are dependent upon exports for their growth as their domestic markets are either small, poor or shrinking. 

At the moment, emerging markets are most at risk from this rise in protectionist sentiment, due to their lesser developed economies and their need for export markets to drive their economic growth.  We have already seen what kind of impact lower trade levels can have on emerging markets in recent years, as global trade has slumped since the financial crisis that started nearly a decade ago.  This has led to much lower growth rates for emerging markets, particular those outside of Asia.  As many emerging markets have been attempting to replicate the export-driven success that Asian economies such as Japan, South Korea and China achieved in previous decades, access to vital export markets is all important. 

However, much of the surge in support for protectionist measures in the United States and Europe has been directed towards emerging markets, as voters in those developed economies have blamed their recent struggles on competition from emerging markets.  Looking ahead, this surge in protectionism is the single greatest threat to the future success of many of the world’s emerging markets, as they need many more years of access to developed markets to expand and modernize their economies.

Emerging markets are not the only ones at risk from the rise of protectionism in many areas of the world.  In fact, some developed economies are now more export dependent than many of their emerging market counterparts.  One example of this is Japan, where an aging and shrinking population has left what was once the world’s second-largest economy increasingly dependent upon exports for nearly all of its economic growth.  The same holds true in many areas of Europe, where a similar situation has left many countries increasingly export dependent.  Moreover, as these countries’ demographic situations continue to worsen, the only avenue for economic growth will be exports. 

Unfortunately, many of these export-dependent developed economies are among those countries where protectionism is strongest.  However, should they choose to bite the hand that feeds them, the only plausible outcome for their economic futures is one of permanent marginalization and decline, as their weakening domestic markets cannot fuel significantly levels of economic growth.

It remains to be seen if those countries not in the grips of protectionism can save the global economy from the potential impact of new barriers to trade and investment in some of the world’s leading economies.  Certainly, non-democratic countries that have a clear need to maintain open trade and investment, most notably China, will move to promote trade and investment in their spheres of influence.  However, democracies are faced with the challenge of electorates that are increasingly in favor of protectionist policies, both in developed economies in North America, Europe and parts of Asia, and in emerging markets such as India.  Clearly, protectionism has proven to be a vote winner in many recent elections around the world, and could play a key role in 2017’s most important elections, many of which are in an increasingly-protectionist Europe.  Even an export-dependent country such as Germany is facing a major increase in support for protectionist measures, desperate its obvious need to maintain access to export markets. 

As a result, global trade and investment needs champions more than ever before, and these might prove to be those countries that can enact pro-trade and pro-investment policies without having to face electorates that are increasingly opposed to free trade and globalization.  This could prove to be the opportunity that one such country, China, has been waiting for, as it seeks to increase its influence over the global economy in line with its growing economic power.