Achieving a healthy balance to revitalise global trade

After you have studied and years later, forgotten everything you learned about Game Theory, there is one lesson that sticks in your mind: Some games cannot be won unless all parties cooperate. There are currently many worries about the turn the world economy may take as a result of the financial crisis, while countries struggle to create jobs and may resort to protectionism. However, I believe such a threat does not exist and on the contrary, one of the good things that will come out of the latest difficulties is that governments will realise that globalisation is good but too much of it can be a dangerous thing.

There needs to be a healthy balance and even if I am wrong in my reasoning, the fact is that some countries have taken advantage of the consumption of others and imported far less. The only way globalisation can work is when all the participants cooperate and when they don't, they form imbalances that drive protectionism.

When the financial crisis began soon afterwards, the stock market rallied because there was talk about China being able to make up for the drop in US consumption that fuelled the world growth of the past decade. Unfortunately the Chinese government had no intention to take on such a role. For years now they have saved, invested and imported as little as necessary.

The last three US presidents have all had the same problem with China, whereby they imported far less than they exported, but especially under George W. Bush, this was overlooked because the Chinese were buying US government bonds and thus financing American debt. One of the biggest misconceptions of the past decade is that China was some sort of super economy impervious to the business cycle and will be able to post over 10 per cent annual growth for eternity. This was not only dangerous but it also helped people believe in an economic reality that did not exist.

Trade can be critical for growth but at the same time the domestic economy, should never be forgotten. For example France is not as heavily exposed to exports as Germany is, and its saving rate is much higher than Britain's. This has helped France greatly in the past months, and will help it even more as it tries to recover. What that basically means is that France does not consume as much as others do and because it is not as export-orientated in a worldwide downturn, it is not as affected as other countries can be. The lower growth rates that come with more stability in the long run translate into few major corrections and upheavals.

Unfortunately, in times of irrational exuberance individuals, companies and governments tend to get carried away and begin to believe their own hype, such as that which was propagated about China and that has not come to fruition. Many people are surprised when I tell them that few companies operating in China have actually made a profit. They have justified their investments there by saying that a foothold needs to be established there since it is potentially the biggest market in the world. And now some of them are complaining that a lot of technology transfer occurred without actual gains - this is why some governments began to temper their enthusiasm for the potential in China even before the crisis.

I am currently reading The Second World War by Winston Churchill and the part about the Great Depression is amazing. If you were to change the names and dates, you could easily use the text to describe what we have seen in the past nine months. However, we have not reached this part yet: "tariff restrictions were imposed to protect the home markets, the general crisis brought with it acute monetary difficulties and paralysed internal credit, this spread ruin and unemployment far and wide around the globe". There can be no doubt as to the importance of trade and the benefits gained from it, but at the same time its limitations should also be understood. Countries look out for their own interests first, which is why it is best to always strengthen the domestic economy and let trade provide that little bit of growth that is needed every year to accommodate changes in demographics. The Chinese stimulus and government plans have emphasised the need to strengthen the domestic economy and increase production to meet consumption needs internally. It is one thing to see the need for trade but it is another to believe in markets that are simply not there.

In the next few years, it is highly probable that we will see countries trying to limit imports by increasing manufacturing at home for multiple reasons, such as creating jobs and strengthening the domestic currency, especially now after all the borrowing that has taken place. However, it is highly unlikely that we will see full blown protectionism because we have the World Trade Organisation (WTO) which we didn't have at the time of the Great Depression, and any country that would break its obligations to the organisation would face severe penalties.

The writer is an economist and independent consultant based in Vienna.