Davos participants warn protectionism could stifle economic recovery

DAVOS, Switzerland: Fear of protectionism stalked the Davos meeting, with government and business leaders stressing the danger that the next phase of the economic crisis could be government policies that crimp trade. Anger at job cuts resulting from the financial crisis and the use of public money in bailouts could lead governments into policies that favor national companies and close markets to foreign products.

Alarm was raised by a US Congress proposal that includes a "Buy American" provision barring the purchase of foreign steel for any publicly funded infrastructure project.

In Davos, all leaders, including Chinese Premier Wen Jiabao, his Russian counterpart Vladimir Putin, Britain's Gordon Brown and German Chancellor Angela Merkel stressed their commitment to openness.

"Trade protectionism serves no purpose as it will only worsen and prolong the crisis," said Wen, whose country is set to overtake Germany as the world's biggest exporter.

"When countries run into crisis, the first response is 'lets be protectionist,'" said Indian Commerce Minister Kamal Nath. "This is an initial response but an ... incorrect response."

Nonetheless, there are already signs of voter anger at foreign competition, seen by many as the cause of job losses.

In Britain last week, a wildcat strike hit the country's third-largest oil refinery where workers walked out over the use of Italian and Portuguese contractors on a building project.

Gary Cohn, co-chief operating officer of investment bank Goldman Sachs, said the public money spent on banks and the auto industry in the United States could lead to calls by voters to protect them from foreign competition.

"Is the US government going to allow foreign car makers to compete with GM (General Motors) and Chrysler with billions of public dollars in them? They might like to, but [is] the public going to allow them?" he asked.

Free-trade proponents argue that an open global economy encourages competition, driving down prices. It also enables competitive national firms to grow by selling to foreign markets.

The one institution capable of acting as a bulwark against protectionism, the World Trade Organization, has failed to persuade members to agree to a new free-trade deal despite seven years of talks.

Leading ministers agreed Saturday that there was a "sound basis" for agreeing on a new global free-trade pact this year, but the complicated negotiations will face multiple obstacles.

WTO director general Pascal Lamy warned that trade was "already a casualty" of the economic slowdown.

Governments are haunted by memories of the Great Depression of the 1930s when a trade war, characterized by high tariffs to block imports, exacerbated the economic problems of the times.

"In the crisis of the 1930s, protectionism delayed the way out of the crisis," said Mexican President Felipe Calderon.

Experts warn that action by one country could easily spark retaliation by another and there is already tension about the steel measure in the draft US law on President Barack Obama's stimulus package.

Germany's Merkel, whose country has a large car industry, said she was "very wary" of the billions of dollars of aid given by the US government to prevent auto giants GM and Chrysler from going bust.

The use of public funds "must not be allowed to last too long because they inevitably lead to some distortion and are quite frankly protectionism," she added.

French Economy Minister Christine Lagarde on the contrary called protectionist measures a "necessary evil" but insisted they should be temporary and agreed with partners.

Alan Binder, a former vice chairman of the US central bank and a leading economist at Princeton University, sought to calm fears, saying: "If I thought for a moment that we might be careering toward a trade war then I'd really be worried. At worst it's going to be modest protectionism." - AFP





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