We saw an article yesterday that gives us hope for the future as we reach these last few days of 2009.   The New York Times wrote,

When the clock strikes midnight on New Year’s Eve, China and 10 Southeast Asian nations will usher in the world’s third-largest free trade area….  Trade between China and the 10 states that make up the Association of Southeast Asian Nations has soared in recent years, to $192.5 billion in 2008, from $59.6 billion in 2003. The new free trade zone, which will remove tariffs on 90 percent of traded goods, is expected to increase that commerce still more.

The zone will rank behind only the European Economic Area and the North American Free Trade Area in trade volume. It will encompass 1.9 billion people. The free trade area is expected to help Asean countries increase exports, particularly those with commodities that resource-hungry China desperately wants.

Being the hand-wringing, left-leaning New York Times, they of course titled the article “In Southeast Asia, Unease Over Free Trade Zone.”  Leave it to the NYT to fixate on the anti-trade grumbling of a small number of people and completely miss the larger story:  that after the biggest financial crisis since the Great Depression, free trade isn’t dead!

We’ve seen a surge of anti-free-trade sentiment pop up in the U.S.and Europe (remember the shameless “Buy American” provisions?), but luckily the actual damage has been fairly small.  Still, while we free traders in the West are fighting a rear guard action to simply hold on to what we have, in Asia they are boldly moving forward.  Good for them.

Increased intra-Asian trade should help to gradually wean the region off of its reliance on exports to the West.  It should help to facilitate the continued rise of the middle-class Asian consumer.  This is good for Asia and good for the world.

We are not “sinophiles” here at HS Dent.  Unlike some other commentators, most notably Jim Rogers, we do not believe that the coming decades will see China emerge as the new world economic leader.  The country simply has too many serious demographic issues with which to contend.   But, we do believe that a healthy China and a healthy ASEAN is beneficial to ourselves and to the world economy more broadly.  So, here’s to the success of the Asian free-trade zone in 2010 and beyond.  Cheers!

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

We try to keep this blog focused on economics and away from politics, but alas, sometimes you can’t separate the two.  Political decisions — be they good or bad — can have a real impact on the economy.   And unfortunately, many of the decisions made by our leaders have been poor and — sadly — driven by a crude, cynical populism that preys on voter fear and restlessness.  How else can you describe some of the recent moves taken by the Obama Administration and the Democrat-led Congress, such as the “Buy American” provisions — viewed by many to be in violation of our trade treaty commitments — and the gross violation of contract rights and the rule of law, such as in the case of the unfortunate GM and Chrysler bondholders.  (To be fair, George W. Bush and the Republicans did much of the same during the prior recession, giving us steel tariffs and farm subsidies that were shameless attempts at attracting Rust Belt votes.  These shortsighted moves crippled Bush’s attempts at promoting free trade later in his presidency as he was then viewed by many as a hypocrite.)

With other world leaders taking similar actions,  many economist fear that protectionism will get out of control — as it did during the Great Depression.  It took a world war and five decades of hard negotiating to give us the free markets we have today; it would be sad to see these gains reversed.

Though it’s difficult to be optimistic about the future of free trade, we are glad to see at least one world leaders vigorously defending it.  As the New York Times writes, “Australia Resists ‘Buy Australian’ Union Pressure.”

Prime Minister Kevin Rudd said Australia’s wealth depended on its access to export markets, which would be compromised by protectionism.

”We need to avoid any form of protectionist measure, which invites retaliatory protectionist measures from economies around the world, and that’s what would happen,” Rudd told reporters.

”The mistake of the Great Depression in the early 1930s was this: economies believed that the way to get themselves through was to shut their economies down and close their borders to imports from abroad,” he said. ”The entire global economy shrinks.”

We find Mr. Rudd’s comments encouraging.   Here is a leader — and one from a left-of-center labour party at that — who is strong enough to resist the siren song of populist protectionism.  He will lose votes for his stance here; he might even lose the next election.  But he is doing the right thing.  Let us hope that other world leaders follow suit.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

A picture can be worth 1,000 words.  The Economist has managed to summarize everything we’ve written about the antiglobalization movement, the rise of protectionism, and the punitive assault on the rich all in one cover: 

 Notice the Blackberry on top of the dead guy in the front?  And the skyline of London’s Canary Warf financial district in the background?  Absolutely classic.  

As we wrote last week in “The Assault on Free Trade Continues,” we continue to see signs of increasing protectionism and economic nationalism.  There is nothing new under the sun.  We saw the same thing happen during the Great Depression (making it considerably “greater” for many formerly prosperous countries) and we saw a lesser version in the wake of the deep recession of the 1990s when the Nafta agreement was being crafted. 

Of course, anti-free-trade sentiment goes back much further.  The Industrial Revolution in Britain was almost killed in its infancy by the protectionist Corn Laws, which were designed to protect the landed agricultural interests.  Had the free traders not won the debate in Parliament, the world might have taken a very different path.

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