Brexit – The Dangers Of Populist Protectionism by Robert McConnaughey, Columbia Threadneedle Investments
- There is a real and rising risk that political reactions to today’s economic anxiety will be counterproductive to global prosperity.
- Abruptly imposing trade barriers would be a wrenching shock to growth. It would also likely be met with retaliation from other trade partners.
- We must watch developments on this front, seeking to position our capital towards problem-solving innovation, whether from technological advance or wise government stewardship.
Commenting on the risks of “Brexit” (the potential British exit from the European Union), my colleague, Leigh Harrison, concludes that the direct economic impact, particularly outside the U.K. itself, would likely be modest. I agree, but I also think that the issue runs the risk of intersecting with other dangerous political currents in the world worth worrying about.
Economic stresses around the world today are fueling growing populist sentiments on the right and left. Technological change and globalization are perceived as threats by many workers of the developed world. Slowing growth, high debt levels, and overcapacity of commodity and industrial production may undermine the rising aspirations of the emerging world’s workers. Some of these perceptions have basis in truth. However, there is a real and rising economic risk that political reactions to these fears will be applied in manners that are counterproductive to global prosperity.
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Root causes of economic anxiety go unaddressed
One only has to look at the U.S. presidential primary proceedings to find a prime example of this risk growing. Leading candidates on both sides of the aisle have built their platforms on fanning the flames of worry. Perhaps the only successful vote-gathering strategy demonstrated to date has been propping up “enemies” to unite against in the form of politically expedient “others”, whether that is Wall Street and the economic elite or immigrants and foreign trade partners. There is a serious dearth of policy proposals being made that even attempt to address, much less solve, the root causes of economic anxiety. While the U.S. election is serving to provide comedians and late-night TV hosts with plenty of material to work with, these issues are not all unique to the U.S. Similar themes are popping up all over the developed world. Political parties that were easily dismissed as fringe or extremist are gaining ground at alarming rates with promises of radical wealth redistribution or nativist reclamation from the corruption of immigration. In almost all cases, if there is one issue that unites the populist left and right, it is trade protectionism.
Beware the dangers of global trade barriers
There is a substantive debate to be had regarding the details necessary in trade policy to protect national values in the face of globalization and the technology-fueled shrinking of the world. In the extreme, completely unregulated global trade would run the risk of a race to the bottom with little regard for intellectual property protection, national security issues, the environment or basic human rights. However, populist economic nationalism via heavy tariffs and feel-good trade barriers has never proved very successful (see the Smoot-Hawley tariff’s disastrous consequences in the 1930s). Abruptly imposing the sorts of trade barriers being suggested on the campaign trail in today’s globally-linked economy would be a wrenching shock to growth. It would also likely be met with escalating retribution from other trade partners.
This brings us back to the threat of Brexit. Given fears that a U.K. exit from the Union would pave the way for others to follow (Frexit?), one can imagine that an EU response might well be reasonably harsh imposition of barriers to UK commerce with the EU. Such action could easily lead to tit-for-tat reactions in both directions. These sorts of actions would seem likely to only fuel further friction in global commerce at a time when the world’s economy can ill afford such hurdles.
Investing in the face of protectionist risks
The global economy is struggling. Growth is sputtering versus historical standards, debt levels across the world are high, and central banks have already utilized many of the tools at their disposal. Yet, there is hope. Technological innovation offers potential breakthroughs in human achievement and economic productivity. Billions of people across the emerging world have the potential to break out of subsistence living into the global middle class. Paths to a bright global economic future exist. However, it is especially crucial, given our fragile economic backdrop, that the people of the world demand that their political leaders demonstrate the courage and integrity to seek thoughtful solutions to challenges rather than pandering to our basest instincts, biases and fears. As investors, we must watch developments on this front carefully, seeking to position our capital towards problem-solving innovation, whether that springs from technological advance or wise government stewardship. To borrow the spirit of a vintage political chestnut, when it comes to investing in the face of protectionist risks, be optimistic — but verify.