Stick to open trade principle
Sunday, 01 March 2009
From Slumdog Millionaire - a British film based on an Indian novel - to Japanese sushi bars in Brazil, to China's massive investment in US Treasury bonds, to internet chat rooms and mobile phones, the world is interconnected to an extent not seen before.
The impact of globalisation is all around us, with travel, transport, communications, trade, credit and investment unrestrained by geography, time or distance.
While it seems incredible that problems in the US housing market could impact on the entire world, it should come as no surprise given the way that almost everything is interconnected.
The financial downturn of the past 18 months began in the US subprime housing mortgage market, setting off a chain reaction that spread through the international banking and credit sectors.
After 10 years of some of the strongest world economic growth in history, the global economy is headed for a deep recession.
There is a view that the Great Depression was prolonged in the US because the government interfered too much.
Many historians believe that government-attempted rescue actions and protectionist policies made the slump more severe, prolonging it to the beginning of World War II.
The world is experiencing the pain of an economic shock with banks not lending, consumers not spending, manufacturing falling, exports plunging and unemployment rising.
As governments around the world take steps to try and ward off recession, the international consequences of domestic policies could be profound.
For example, President Obama's latest spending package of $US800 billion ($1250 billion) is designed to stimulate the US economy and includes a range of tax cuts and spending on infrastructure, among other things. However, Obama's package includes a "Buy America" provision that means infrastructure spending from the package must be used to buy goods manufactured in the US.
This has caused an outcry in countries such as China where the "Buy America" requirement has been slammed as trade protectionist "poison" which will have catastrophic effects on developing countries.
Any rise in trade protectionism is likely to spark a humanitarian crisis as well as worsen the financial crisis in developing countries, affecting billions of people.
Historians cite US protectionist policies adopted in the 1930s as one of the triggers of the Great Depression, as well as deepening the impact of the Depression worldwide.
In the US, leading business groups fear that other countries will retaliate against the "Buy America" clause by keeping American goods out of their economic stimulus packages, triggering trade wars.
The costs will be enormous if governments are tempted to respond to the financial crisis by adopting trade-impairing policies or imposing regulations that inhibit globalisation.
Countless developing countries owe their recent economic success to trade and investment facilitated by free markets and trade liberalisation.
Australia's economic performance has long been underpinned by the nation's ability to trade successfully, particularly in minerals, coal, tourism, education and other services.
The impact on Australia of growing trade protectionism may not be as severe as on many developing nations because there has been a concerted effort during the past 12 years to focus on trade agreements with individual countries, rather than rely solely on agreements with multiple countries.
We are hopeful the US-Australia Free Trade Agreement negotiated by the Howard government will protect us from the consequences of the "Buy America" clause.
It is vital that Australia remains committed to the principles of more open trade that have benefited us and lifted millions in developing countries out of poverty.
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