6 February 2009

The 5-day World Economic Forum in Davos, Switzerland over the last weekend of January failed to come out with any new plan to stem, much less reverse, the global financial and economic slowdown. It wrapped up with the realization that the depth of the crisis is still unknown and the solution remains elusive.

One salient issue that haunted the Forum in Davos was the fear of protectionism. Job cuts resulting from the financial crisis and the use of public money in bailouts could lead government into policies that favour national companies and close markets to foreign products. It's already happening. In Britain a wildcat strike hit the country's third largest oil refinery where workers walked out over the use of foreign contractors on a building project. On the table is a US Congress proposal that includes a "Buy American" provision baring the purchase of foreign steel for any publicly funded infrastructure project in President Obama's stimulus package.

An open global economy encourages competition, driving down prices. It also enables competitive national companies to grow by selling to foreign markets. There is then this dilemma. Are governments who pumped billions of public money into ailing national corporations going to allow foreign products or services going to compete with them? Are they still going to allow the hundreds of thousands of foreign workers to stay on whilst thousand of their nationals are losing their jobs each day? They may like to, but are the public going to allow them?

We are reminded again of the memories of the Great Depression of the 1930s when a trade war, characterized by high tariffs to block imports, exacerbated the economic problems of the times. Protectionism then delayed the way out of the crisis.

But we are seldom reminded of lessons to be learned, of not falling into complacency during good times, of preparing for rainy days and of not putting all our eggs into one basket.

There is no doubt whatsoever that an open global economy is good if it is a level playing field. By not putting all our eggs into one basket, we then insure ourselves and spread our risk but then do we not remind ourselves not to be over dependent. An export oriented economy is subject to vagaries of the export market. The domestic economy has to be developed as well to be strong and resilient for it to defend itself against such crisis.

This current fear of protectionism is particularly aimed towards the US, rightly so for it being the leading and biggest economy in the world. Any move at protectionism by the US will definitely affect most developed and emerging economies who are highly dependent on the US market for their exports.

Much has been said about the power and promise of the Chinese and Indian market. China will be the world's third largest consumer market by 2025 and India No. 5. But the mathematics obscure such heraldry. Chinese consumer spending is projected to reach $ 1.3 trillion this year. That would approach France's $ 1.4 trillion but a far cry in comparison to US $9.9 trillion. Indian consumers will spend $660 billion or about half of China's.

The natural rubber industry of the tripartite countries is not spared of the same dilemma either, a high dependency on exports, where about 80% of their total production are exported. Except for Malaysia, the two leading producers' proportion of domestic consumption still remains at single digits. These tripartite countries still have a long way to go to develop their upstream rubber activities which to a large extent can cushion their downstream rubber sector from the vagaries of the export markets as well as the volatility of natural rubber prices.