The end of free trade?

The agreement by the United States government and legislature to extend $15 billion in federal funds to the country’s three major automakers can be considered the dawn of a protectionist trade era. Granted, the U.S. federal bailout of the three - General Motors Corp., Chrysler, Ford Motor Co. - comes far short of the $34 billion sought by the three automakers and the loans will be provided under the pretext of subsidies for development of fuel-efficient vehicles. But Mark Zandi, chief economist of Moody’s Economy.com, observed that $15 billion would be just enough to keep the three afloat for a year. He estimated the automakers will actually need as much as $125 billion to avoid bankruptcy within the next two years. Under his calculation, Washington would have to channel eight times more funds into its domestic automobile industry.

Advocates say a rescue of the automobile industry that is so closely knitted to the U.S. economy is necessary to safeguard jobs. They rationalize the funding to the auto industry by claiming it as a fair trade, disregarding regulations of the World Trade Organization. As the U.S. shifts to a policy targeted to protect its domestic industry, it is bidding farewell to the hard-fought global free trade mechanism. The clear anti-protectionist rhetoric from last month’s Asia-Pacific Economic Cooperation Summit where leaders agreed to stop protective trade practices for a year is no more. Governments are turning bolder in declaring protective action. The British government has said it was reviewing measures to protect its own automobile industry.

What hurts is that the protective measures by advanced markets center on our key exports, cars and semiconductors. The global markets for these items have drastically soured. Combined automotive sales by the U.S. and Britain shrank 37 percent in November from a year ago. The figures are the worst since the Great Depression swept the U.S. and Europe in the 1930s. Prices for DRAM chips dropped nearly 60 percent from earlier this year. JP Morgan estimated Samsung Electronics will be the only one to survive in the industry if the price downward spiral continues in 2009.

Market principles are being seriously undermined amid protective trade practices. Taiwan’s government is rescheduling loans to its four semiconductor producers and Germany is also poised to infuse emergency loans to chipmaker Qimonda AG. We need to make efforts to stop the spread of protectionism. At the same time, we may have to take the offensive to keep the battle going.