Share of global resources plotted against share of world population

The threat of protectionism

Protectionism is a word that will strike fear into the hearts of supporters of global free trade. It is, however, alive and well and indeed thriving in the prevailing environment for food and energy where higher prices are exerting a particularly severe squeeze on consumers in emerging markets. In turn, those same consumers are pressing for higher wages, which in turn is having a negative impact on regional inflationary pressure.

Inevitably, Asian governments are acting to try and limit this inflationary pressure but, as ever, the tools at their disposal are limited and in the case of export duties / quotas and subsidies on imports, particularly blunt instruments.

Food is, of course a highly emotive issue in the region and often weak administrations have experienced a sharp increase in public demonstrations against higher prices over the past two quarters. We anticipate that this is something we will see more of as the Beijing Olympics draws near.

In attempting to protect domestic markets from exogenous inflationary shocks many countries are closing their borders and / or restricting trade in the commodities in which upwards pricing pressure has been most severe. But export barriers reduce the global supply of scarce commodities and serve to push prices even higher. Not only that; it is our suspicion that what we are seeing is not some transitory effect but something that could well last for some time, particularly if the globalisation process reverses.

In due course the cost of maintaining subsidies and reducing exports could have a marked negative effect on many countries current accounts, limiting the scope to use currency strength to limit rising cost pressures. In addition, by subsidising local producers to keep prices down, governments are essentially dis-incentivising industry and limiting the attraction of producing more, again serving to drive prices higher.

At the same time, these measures often act to limit the scope for foreign investment, often a necessary pre-condition for industry development in developing economies. The end result is the same, reduced production and higher prices.

The following table, reproduced with the kind permission of UBS, reveals recently imposed agricultural trade restraints by country.

The role of oil prices

Just as agricultural product prices are rising, so is the price of oil on world markets. This should come as no surprise since government action to interfere with the price of oil on the world markets has been in place for over a century.

It is hardly a surprise, in the prevailing environment, that industry watchers are alert to criticism regarding producing countries attempts to derive increased royalties, impose higher taxes and raise local ownership to benefit more fully from the seemingly inexorable rise in prices. At the same time it should come as no surprise that oil consuming countries are redoubling efforts to improve oil efficiency and alternatives.

Two additional developments have occurred further to muddy the water. Firstly, upstream oil operations are being increasingly denied access to local resources and where access is granted it is becoming more costly to acquire.

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