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Minyuan Zhao
  Minyuan Zhao

The Fraying of Free Trade

4/16/2009 --

Business leaders play an important role in supporting free trade, says Ross professor.

ANN ARBOR, Mich.—With the world facing an economic downturn, populist appeals to limit foreign goods or investment are inevitable. While there have been some scattered protectionist moves and chatter, the G20 leaders recently stood by their support of free trade and resistance to protectionism in a public statement. Minyuan Zhao, assistant professor of strategy at Ross, says the Obama administration and other world leaders seem committed to free trade. In the following Q&A, Zhao notes while populism is a tempting tonic, world leaders must resist the urge to reach for it. And business leaders have their own role to play.

Recently there have been some moves by governments that some say look like protectionism. The Chinese government blocked Coca-Cola's bid to buy a big juice company there, citing monopoly law. The stimulus bill in the U.S. had a "buy American" provision. Is protectionism on the rise as the global economy falters?

Zhao: I think all the politicians and policymakers understand the importance of free trade. President Obama and the Chinese government have repeatedly said they are not going to go for protectionism. I don't want to underestimate the intelligence of decision makers. I'm sure they know the economics and they know the importance of trade to both countries. It's just so tempting to grab this direct relationship between job loss, recession, and a foreign trade partner and say, "We're going to do something to defend our interest." That's populism, I think. I don't think leaders really want to go for protectionism, but these kinds of measures are inevitable when people are angry and the policymakers want to grab legitimacy and they need support from a broad base. It's just the easiest way to do it. "Buy American" is a very easy slogan to say, and people who lost jobs will feel better about the government.

So if populist appeals -- even if it's just words and not policy -- are inevitable and expected in an economic downturn, how worried should countries dependent on free international trade be? Should they make sure their voice is heard?

Zhao: Yes. But companies are facing a very difficult time now. I have received an email from Professor Jean-Pierre Lehmann at IMD calling for business leaders to step up and support free trade. The letter says that in the Great Depression, the business leaders didn't do what they should and as a result the whole world went into a downward spiral. This is a time when business leaders should play their role. But business leaders are really demonized right now. Some people will think anything they do is for profit, or for their own bonuses. Support of free trade is being associated with greedy managers "exporting jobs" to China to fatten the bottom line. So the business world remains quiet.

What would the consequences of protectionism be at a time like this?

Zhao: Protectionist policies might not help domestic industry at all. One problem is retaliation. In the U.S. everyone talks about the large trade deficit we have but exports are an important part of the economy, especially in the high-tech area. That's an area where the U.S. has advantages. So retaliation against protectionism would hurt the most profitable and most stable part of the economy. The second thing is that every part of the economy is inter-related. For example, if you block steel imports then, yes, American companies would be forced to buy American steel. But without the competition, prices will edge up. The cost for Boeing airplanes, for cars: All the downstream costs will be higher. If they cannot compete globally, they will lose to Airbus, they will lose to the Japanese and German automakers, and there will be more layoffs. Different parts of the economy are so closely related that any anti-trade movement in one sector will affect a lot of other sectors as well. These relationships are indirect. It's not as direct as saying, "If we block imports, the steelmakers will have jobs." That's so obvious that it's vulnerable to populism. The long-term impact downstream is a secondary story even though the impact may be larger.

Taking all of this into account, do you see free trade under a real threat or do you think these populist appeals are words and not actions?

Zhao: I don't think the world will go back to 1930. But these populist slogans can potentially slow down investment. It creates so much uncertainty that companies are waiting for the air to clear up before considering any serious cross-border activities, and that can be harmful to our economic recovery. I think the Obama administration with a lot of smart people around -- deeply understands the importance of free trade. Populism is usually important when political parties face direct competition with each other and each wants to win in the court of public opinion. In China it's the same thing. Concern about social unrest, concern about the legitimacy of the regime, leads to populist slogans.

So on the trade front, do you expect things to stay largely the same?

Zhao: Not quite the same. There will be more regulation and more restrictions, but I don't see the world going back to autarky, where trade is blocked off and where foreign direct investment faces high barriers. That's highly unlikely.

During the campaign, Obama expressed some displeasure with NAFTA, but then toned it down. Do you see any changes being made to that treaty?

Zhao: I don't think there will be fundamental changes in the next half year or so. The countries are trying to deal with the crisis, so it would be a bad idea to disrupt the normal flow of trade and engage in reforms. Also, in my opinion, the very purpose of setting up NAFTA is not purely economic. You have this powerful Eurozone, and the Asian countries are getting together. So having a strong, stable backyard is also important for the U.S.

We've talked about the U.S. and China, but what about Europe and the Eurozone? What are you hearing there?

Zhao: Europe is facing two big challenges at this moment. One is the Euro. Some economists have been predicting the end of the Euro because countries are moving in such different directions. Because of the common currency, their hands are tied in terms of monetary policy, and some countries, like Spain, are so deep in debt they can no longer afford the fiscal policies to stimulate their economies. So it is a tricky moment. Another challenge is the free flow of labor in the European Union. In countries like the U.K. and Italy, there is increasing tension between domestic workers and migrant workers from Poland, Czech Republic, and other newly admitted EU countries. What the leaders decide to do now will have long-term impact on the future development in Europe.

—Terry Kosdrosky

For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847,