How Do You Protect Free Trade?

Overall, we see lots of reasons to be optimistic about global economic growth these days—even the eurozone isn’t doing as badly as many fear. One potential risk to the bull market, however, is the potential for escalating trade spats and protectionism. And the world’s report card on those subjects has been somewhat mixed over the past 12 months or so.

A hot trade war still seems a relatively low risk, however. And global trade is overall healthy and improving—including in Europe. For example, Eurostat’s recent trade data showed much improvement, with total trade growing 6% y/y in April.

Yet Europe’s politicians seem to want to imperil that progress with trade spats with China. In June, the EU imposed 11.8% tariffs on Chinese solar panels, citing illegal subsidies. China answered the protectionist measure with an investigation of its own—into European wines. And the EU is threatening to investigate Chinese telecom.

In our view, these moves are likely more politically motivated than anything else, and overall everyone should see reason. But a little protectionism can go a long way in hindering free trade and hurting economies—protectionism is usually met with protectionism in return. And increased protectionist measures could be especially painful for still-weak Europe. Hence, there seems to be little sense to restricting trade with its “second-largest trading partner,” China.

On the other hand, the EU-US free-trade agreement (FTA) seems to be moving forward just fine, even after some political hemming and hawing. This week, President Obama and a number of EU officials announced FTA talks will begin this July in Washington DC. During the talks, officials plan to address tariffs, regulation, tax policy (and evasion) and corporate transparency.

Those are certainly good goals, but how they play out remains to be seen. Any FTA can take a while to complete—and the Trans-Atlantic FTA is the largest in history, including the US and the EU’s 27-soon-to-be-28 members, all with their own interests (and electorates) at heart. For instance, France demanded its audiovisual industry remain exempt, as it historically has been, from the FTA. Officials are fine meeting that particular caveat, but do worry other industries may ask for similar, protectionist leniencies. Still, EU-US trade relations are already some of the freest in the world—this FTA likely benefits both economies, even if just incrementally.

And there is even speculation of a US-China agreement. We expect this to be a slow road (think NAFTA, which took years). But that’s certainly better than quarrelling about who’s dumping what. Plus, potential US-China talks, combined with US-EU talks, could positively influence China-EU trade relations.

Though spats have surfaced, we still see little risk of protectionism’s derailing global free trade or economic growth in 2013. But we’d note it’s always worth watching—particularly since protectionism is an easy way for politicians to score points when economies aren’t growing as robustly as folks would like.