EDITORIAL: The global recession

This is going to be a hugely challenging year for the world economy. It faces a critical choice: Will it turn its back on globalization and move toward protectionism, or will it reject protectionism and maintain free trade?

The world has been caught up in a full-blown financial crisis since last autumn and is now sinking deeper into synchronized recession. To mitigate the painful effects of the global downturn on their economies, many countries are making moves that smack of protectionism. Symbolizing this trend are responses by key economic powers to the predicament of their domestic auto industries.

Last month, the U.S. government decided to provide $17.4 billion (about 1.5 trillion yen) in emergency loans to General Motors Corp. and Chrysler LLC., which are on the verge of bankruptcy.

The European Union, Britain, Sweden and China have also started providing public aid to their troubled auto industries. Russia is set to raise tariffs on car imports this month to protect its own industry.

It is difficult to criticize a country that feels it cannot allow its auto industry, which provides so many jobs, to collapse amid this harsh recession.

But what should be borne in mind is that protecting domestic industries could lead to even more serious problems in the long run.

By providing financial assistance to car manufacturers, governments in effect are offering export subsidies that help bolster the competitiveness of their exports.

But countries targeted in export drives by carmakers that are receiving government support tend to adopt defensive measures, such as subsidies to domestic makers and hikes in car import tariffs.

Such policy actions, coupled with tit-for-tat responses, could eventually escalate into a global wave of protectionism.

That is exactly what happened during the Great Depression, which started in 1929 in the United States.

At the time, the U.S. government moved to protect domestic industries amid surging unemployment by raising tariffs on a wide range of imports. This triggered similar tariff increases by countries in Europe and elsewhere.

The wave of protectionist moves caused all the countries involved to enter a long and damaging recession, ushering in the gloomy era that led to a devastating world war.

There was no winner in the trade war. Nations should not repeat this mistake. They should not allow the world economy to fall into the same abyss by succumbing to the temptation to retreat behind the protective walls of trade barriers.

It will take at least several years for the world economy to regain health. Preventing protectionism from raising its ugly head requires strong political will on the part of world leaders.

The leaders of the Group of 20 major countries sent an encouraging signal in their emergency meeting on the financial crisis in November, when they pledged to work out by year-end an outline of a new trade agreement under the Doha Round of global trade talks that are still continuing.

But they failed to strike a deal by the end of the year, dimming the prospect for a successful conclusion of the negotiations.

Japan should strongly urge major trade powers such as the United States, Europe, China and India to reopen the trade talks as quickly as possible.

As a resource-poor nation with a shrinking population, Japan will have no choice but to continue to rely on global trade for its economic well-being. Japan can contribute to the welfare of the world as a whole while protecting its own interest by working to keep global trade flowing freely.

But it will take a lot of time to forge consensus among the 150 or so countries taking part in the Doha Round. It might be a good idea for the government to first try to establish an idealistic model for free trade agreements.

One potential candidate for such a model is the U.S.-proposed free trade zone encompassing the countries of the Asia-Pacific Economic Cooperation forum.

As a first step in such efforts, the Japanese government should start negotiations for participation in the economic partnership agreement envisioned by countries in the region, including the United States, Singapore and New Zealand.

--The Asahi Shimbun, Jan. 3(IHT/Asahi: January 5,2009)