On May 6, 2009, the Stanford Institute of Economic Policy Research (SIEPR) held a breakfast with the President of the New York Stock╩Exchange, Duncan Niederauer. He spoke briefly on the topic of “The Global Financial Crisis: A╩View from the Center of the Capital Markets.” He spoke on the challenges facing America in these tough economic times, and warned of the dangers of America turning towards protectionism.
It is well-understood that in times of economic turmoil, trade is usually the first thing that gets hit. Although America has a moral obligation to take care of its own people first, it is arguable that a policy of buying only “Made in the USA” goods might cost us foreign goodwill. The economic drawbacks of protectionism are well-documented. The political consequences abroad could be significant too.
Consider Asia, where the most trade-dependent nations have been among the worst-hit. Japan has been in recession since the third quarter of 2008. South Korea’s first-quarter growth was an anemic 0.1 percent. In Taiwan, Goldman Sachs projects that the island’s GDP will shrink 7 percent. According to The Financial Times, Singapore’s GDP sank 11.5 percent in the first quarter of 2009 compared to a year earlier, one of its worst performances since achieving independence in 1965.
According to Bloomberg, Asia’s developing economies are “almost twice as reliant on exports as the rest of the world, with 60 percent of their overseas sales ultimately destined for the U.S., Europe and Japan.” Ever since the 1960s and 1970s, the four Asian “tiger” economies╤Singapore, Taiwan, South Korea, and Hong Kong╤relied on an export-driven model of economic development. They exported vast quantities of goods to the U.S. and other First World nations, giving them double-digit growth rates that enabled them to achieve First World standards of living.
Nouriel Roubini, the New York University economics professor who predicted the financial crisis, has declared the Asian “export-led growth model” to be “broken.” But although he argues that these Asian nations need to increase their domestic consumption to make up for the fall in U.S. imports, this idea seems impractical. To what extent can Singapore, a nation of five million people crowded on a small island four percent the size of Israel, prosper on domestic demand? For better or for worse, more money can be made by selling to the U.S. market of 300 million people. Over the long haul, for all its faults, the Asian “export-led growth model” works better than the non-free market alternatives.
But if America turns too heavily to protectionism, small Asian nations will be forced to turn to rising powers like China and India for economic opportunities. Their populations could absorb vast amounts of exports, although not to the same extent as America’s. And with their vast resources and a combined population of about 2.5 billion, China and India are still expected to achieve growth rates exceeding 7 percent this year╤and offer vast economic opportunities despite the global pessimism. Small nations that depend on China and India for their economic survival are likely to vote pro-China and pro-India when it comes to U.N. resolutions and on other important global affairs.
The old cliche still rings true: when America sneezes, the world catches a cold. Yet, America’s consumption still plays a leading role in driving global economic growth. It is in America’s national interest to keep it that way, because by keeping other countries’ prosperity dependent on us, we earn a sizeable amount of foreign goodwill that may translate into a friendlier world. Even as President Obama continues to travel the world, let us hope that even as some U.S. jobs in vital industries are preserved, foreign suppliers will not be excessively shut off from U.S. markets.