Rise of Protectionism
In the aftermath of the 1929 stock market crash the American Congress passed the Smoot-Hawley Tariff to protect American industry from foreign competition, mostly from Europe. The results of that protectionist measure were not what the authors of the bill wished. US exports fell by 67% as affected nations retaliated and the result was a depression that lasted until World War II. Today Russia has invaded Ukraine, the West has imposed sanctions, and Russia, followed by 46 other countries, has restricted or stopped exports of fertilizers, food, and critical commodities, preserving them for home consumption. This rise of protectionism may spell the demise of open markets and the onset of a long term global recession.
Spreading Export Limits Country to Country
We wrote about how the war affects Ukraine’s agricultural production and many commodities. Now it turns out that Ukraine is not going to export much of what it does produce so that it can feed its people. Then Russia has cut off fertilizer and grain exports to guarantee adequate stores at home. Forty-five other countries are following suit by cutting exports of fertilizer and food stuffs in order to stock up for expected shortages. Indonesia produces half of the palm oil in the world and has quit exporting. Turkey is holding its butter, corn, lamb, beef, and vegetable oils.
Strategic Issues Affecting Trade
Both the EU and US have been looking seriously for years at reshoring strategic industries. Treasury Secretary Yellen added fuel to the fire recently when she said that the US got a wake up about our supply chains with the pandemic and China’s continuing use of a zero tolerance Covid policy that shuts down whole cities like Shanghai. Her comment was that efficient and cheap supply chains also need to be secure and resilient. Read this is anywhere but China or perhaps only US allies.
How Will the Ukraine War Reorder Trade Relationships?
India has been criticized for buying natural gas and oil from Russia while the Europeans are working to severe their trade relationships. It should be noted that India is getting a sweetheart deal. Putin started the Ukraine war by signing deals for coal, natural gas, oil, and wheat with China. It may be that if Russia drops their prices, they will be able to sell as much as they want, providing that they do not use everything at home. In the UK, Greece, and Spain grocery stores are already limiting purchases of cooking oil and cereal. Prices are up and are likely to keep going up as protectionist measures compound supply problems. Meanwhile Colombia and the US are exporting more coal as buyers avoid Russia as a supplier.
How Long With Economic Effects of the Ukraine War Last?
The war in Ukraine could grind on for a long time as Russia’s economic situation worsens and Ukraine’s infrastructure is destroyed. As of now the World Bank is predicting that commodity prices will stay up for two to three years dues to war-related disruptions. It is becoming clear that the US, UK, and EU want to leave Russia significantly weakened and isolated in the aftermath of the war. The longer the Russian war in Ukraine last one might expect a multiple of that time for the economic fallout to be over. The end result is likely to be significantly changed trade relationships and lingering protectionism.
Predicting How Protectionist Practices Will Affect Markets
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