A new wrinkle for globalization

By Katrin Bennhold
International Herald Tribune
Jan 24, 2006

Russian muscle-flexing over natural gas supplies, a left turn in Latin American politics, the growing industrial might of Asia and protectionist noises in the U.S. Congress and continental Europe: Economic nationalism in various guises is on the rise across the world. And this could have cascading implications for politics, economics and business in the years to come, according to officials, economists and executives heading for the World Economic Forum in Davos this week.

"The resistance to globalization has a new quality today," said Joseph Nye, a professor of international relations at Harvard. "You have populist leaders in developing countries who are empowered by high oil prices and you have a protectionist climate in the rich countries. The two trends reinforce each other and could slow globalization."

Certainly protectionist tendencies and economic nationalism are not new. In the 1970s, the Organization of Petroleum Exporting Countries withheld energy for political ends. In the 1980s, the emergence of Japan on the economic world stage prompted large U.S. companies to demand a series of measures aimed at Japanese imports.

But what is novel about today's climate is that both types of nationalism are gaining currency at the same time and in a broader number of countries, analysts say. The backdrop is a fundamental shift in power in the world as a number of midsize nations emerge to rival the political and economic dominance of the West - and as a global race for energy resources increasingly determines influence.

An oil price that has flirted with $70 a barrel and soaring prices of other fuels has transferred economic clout to resource-rich countries.

Russia sent shock waves across Western Europe and beyond when Gazprom briefly cut the supply of natural gas to Ukraine on Jan. 1, an action that some critics said was a punishment by President Vladimir Putin of a former Kremlin satellite for aligning itself with the West.

Meanwhile, oil revenues have allowed Venezuela's president, Hugo Chávez, to cement a network of leftist allies - from Evo Morales in Bolivia to Néstor Kirchner in Argentina - by offering them loans and subsidized energy.

"At this price, oil has become a foreign policy instrument," said Kenneth Rogoff, a former chief economist of the International Monetary Fund and now a professor of economics at Harvard. "At $20 a barrel, Putin and Chávez would be down on their hands because they don't have an economy; but as it stands, they have enormous latitude to do what they like."

Lilia Shevtsova, a senior associate at the Carnegie Moscow Center, put it more bluntly: "The oil price strengthens neo-imperialist instincts."

If the trend toward leveraging resources in the global political and economic arena has raised questions about energy security, it has also made it harder to create a consensus among leading powers to sanction energy-rich countries for flouting international agreements. Iran, which was found to be in noncompliance with International Atomic Energy Agency rules, is a case in point: China, a member of the United Nations Security Council, has signed lucrative energy contracts with Iran, making it more reluctant to agree on economic sanctions.

"High oil prices and the emergence of a number of new players on the world stage - not just China and India but also Russia and even Iran - have made it possible to play the major powers off against each other," said Klaus Schwab, the founder of the World Economic Forum.

But if the might-makes-right facet of economic nationalism has global powers scrambling to protect their geopolitical positions, its slightly more subtle cousin is setting off another type of defense that may be wreaking quiet havoc within the world's economies.

China, for example, in many ways represents both sides of the nationalism coin. China, the world's second-largest consumer of oil, after the United States, has promised aid and investment to resource-rich countries in return for their resources, giving them political leverage. But China has also become a byword for everything that scares voters in rich countries about globalization, fostering anxieties about job losses and in turn fanning protectionist rhetoric.

In the United States, according to a recent Harris poll, 4 in 10 people say they believe that China will become stronger than America within a decade, while a recent European Union poll shows that the term globalization has negative connotations for almost half of respondents, most of whom cite their fear of job losses.

Unemployment remains high in many continental European countries, and job creation is lower in the United States than in past economic upturns. On both sides of the Atlantic, wages have risen less than productivity gains as a growing number of sectors have become vulnerable to outsourcing in low-cost countries.

"Conventional wisdom has it that globalization is a win-win but that is increasingly looking like a pipe dream," said Stephen Roach, the chief economist of Morgan Stanley. "There is no escaping the concerns that workers in high-wage countries have."

But protectionist sentiments may continue to surface amid tepid economic growth in Western nations. After the EU and the United States imposed temporary quotas on Chinese textile imports last year, manufacturers have pressed for anti-dumping duties on Chinese shoes.

Protectionist sentiment also hampers progress in global trade talks aimed at removing barriers to trade, said Pascal Lamy, director general of the World Trade Organization.

"In nearly every corner of the world we hear echoes of protectionism," Lamy said. "It's cause for concern to be sure and one of the most important reasons why we need to conclude the Doha round of trade talks by the end of this year."

In July 2007, President George W. Bush loses his fast-track negotiating authority, which forces Congress to vote on deals quickly and without amendments. It is unlikely to be renewed.

A rise in protectionist sentiment also makes it tricky for companies to navigate new markets.

"It is no longer just the traditional defenders of protectionism who undermine free trade," said Peter Brabeck-Letmathe, chief executive of Nestlé, the world's largest food company. "The protectionist rhetoric is now coming from many different sides."

Some governments appear to be using back-door methods, like tough health and safety standards, to keep out foreign goods, while others have struck a tougher tone on foreign takeovers. Last year, the U.S. Congress opposed the takeover bid by Cnooc, a state-owned Chinese oil company, for Unocal, an American oil company. Last summer, the French establishment reacted aggressively against the prospect that Groupe Danone, the French producer of yogurt and bottled water, might be taken over by PepsiCo. Last month, it published a list of strategic sectors that could be protected from foreign bidders. Yogurt was not included.

Meanwhile, Germany recently opposed efforts by Thales of France to buy Atlas, a submarine electronics company.

Analysts warn that continued interference with free markets, can help entrench protectionist attitudes in the electorate - and reinforce similar instincts in other countries.

Indeed, developing countries are now the biggest sponsors of anti-dumping cases at the World Trade Organization. And efforts to get China to allow its currency to appreciate more sound less credible.

Rogoff, the Harvard professor, put it this way: "When the leading countries use such rhetoric, it can cause a lot of backsliding in the rest of the world."