Financial Tsunami Fuels a New Wave of Protectionism

The shockwaves of financial tsunami, elicited by the credit crunch in the U.S., have incurred various degrees of damage to economies ranging from OECD members to emerging markets. Global economy had just been badly hit by the first wave of the attack. The scope and depth of the scourge are still an uncertainty. However, it is for sure that globalization has aggravated the impact of financial crisis around the globe. In the ‘Lehman Brothers’ incident, risky derivatives, ‘mini bonds’ was packaged and promoted as a ‘low risk’, ‘high return’ product, which was sold in huge volume to laymen investors via commercial banks. Financial institutions absorbed enormous amount of capital from investors all over the world via the sale of these ‘high risk’ derivatives. Lax regulations, flood of capital and ease of capital flow aided by advances in electronic banking systems facilitate the boom of derivative markets, which sets the time bomb of today’s financial crisis.

The collapse of the housing market in the U.S. has triggered off global deleveraging processes. Sufferers are not only confined to those holding the U.S. assets. Emerging markets like China and India also feel the pain. In China, export constitutes a significant portion of the GDP. China has long maintained a trade surplus with the U.S. . Economic downturn in the U.S. will be a blow to China’s export industry. A slump in the demand for export goods will force hundreds of mainland factories to close and mass layoffs will further exacerbate the already grim unemployment situation. Those who believed that China’s economy would be ‘decoupled’ from the impact of the recession in the U.S. had already paid the price.

The devastation of financial crisis has been spread from the ‘virtual’ economy to the ‘real world’ economy. People suffering the pain will have a stronger quest for a tighter regulation on the operation of financial institutions. For the sake of answering the call for stabilizing and regulating the financial market, all major governments will impose more restrictions on the financial institutions and will inevitably limit the development and sale of innovative financial products.

The U.S., being the epic centre of the financial turmoil, will draw the attention of anti-globalization activists. They believe that economic globalization and ideology of neo-liberalism as promulgated by the U.S. are to blame for the current crisis. Economic recession around the globe will lead to mounting political pressure to force the government to adopt more protectionist policies in order to safeguard employment. Waves of employment will certainly seed protectionism in the years to come.

Globalization is a historical process. Whether the trend of economic globalization will proceed or regress depends on whether, protectionists or liberalists, will dominate the political arena of the major economies.