Where trade flourishes, business is good. But trade does not always flourish. The linked forces of globalization move in fits and starts.

The authors of Power and Plenty, a new book on trade over the last thousand years, tell us as much. “If anything,” they write, “history suggests that globalization is a fragile and easily reversible process.”

One of the looming threats in 2009 is the reversal in trade flows and increasing barriers to trade.

For the first time since 1982, The World Bank predicts global trade volumes will shrink in 2009. Undoubtedly, global trade enjoyed a boom over the last two decades or so. The global slump, though, is taking a bite out of that happy ride. Already, through November, exports from China, Taiwan, Chile and South Korea plunged by 20% or more.

The falloff in trade is worrisome enough as a globe-trotting investor. In the last several years, companies with operations overseas did much better than those confined to North America. In 2008, though, that wasn’t true. According to Bespoke Investment Group, stocks of companies that booked more than 50% of their revenues abroad fell 46% on average in 2008, versus a drop of 38% for those with no international revenue.

But there are signs that things could get much worse. Because like tea leaves steeping in a pot of hot water, the longer the economic slump persists, the more likely political trouble is to brew. The rise of barriers to trade is a particularly bitter brew of political trouble.

Already, a number of countries have taken actions to close their markets or protect domestic industry. Consider:

- Indonesia – new restrictions on over 500 goods as well as new fees for imports
- Russia – new tariffs on imported cars, poultry and pork
- France – a new state fund to protect French companies from foreign takeovers
- Argentina and Brazil – new tariffs on imported wine, leather goods, peaches and more
- India – a new 20% duty on imported soybean oils.

And then there is the U.S. bailout of the automakers, seen as an unfair subsidy by foreign competitors. This is only a partial list involving some of the bigger economies. However you view these moves politically, there is a good reason we should keep an eye on these things: They will affect how you invest.

For example, Russia is Europe’s largest car market. But now there is a tax on foreign cars of as much as 35%. Moscow wants to protect its automakers. The Russian people are poorer because of it. But as an investor, your favorite automaker, which may have had a nice business selling cars in Russia, may now find it tough going.

Moscow also put high imports on poultry and pork. Russia is the largest market for U.S. poultry. If you own a chicken producer, this is not good news. Your potential profits in a big foreign market are cut, and such tariffs could result in excess poultry staying in the U.S., leading to falling prices and lower profits at home.

All of these kinds of moves tend to happen when economies weaken. They can also bring about nasty trade wars.

In 1930, America passed the Smoot-Hawley Tariff Act. It raised tariffs on a number of imported goods. As the authors of Power and Plenty contend: “It triggered a wave of tariff increases.” By 1931, “average tariffs on foodstuffs had risen 53% in France, 59.5% in Austria, 66% in Italy, 75% in Yugoslavia, more than 80% in Czechoslovakia, Germany, Romania and Spain and to more than 100% in Bulgaria, Finland and Poland.”

These were hard to unwind. It took decades to reverse these anti-trade policies. They certainly didn’t help resolve the Great Depression.

I don’t think it is a coincidence that global trade expanded nearly fourfold since 1990, during a time when the average tariff fell from 26% to 8.8% by 2007.

A reversal of that trend spells bad things for investors. So far, we’re OK. Most of our companies sell goods that other countries can’t get enough of – things like fertilizers, road-building machines and power equipment. In many foreign countries, there is little domestic supply. China, for instance, it is trying to keep fertilizers in, not out. In fact, the Chinese have made it easier to import goods such as potash.

Still, it’s something to watch.

Source: Globalization Halt!

This from Taipan’s Emerging Markets blog:

Members of APEC, Asian-Pacific Economic Cooperation, ended their annual summits today in Lima, Peru. One of the main topics, besides the economic crisis, was free trade.

(By the way, APEC consists of member economies like China, Vietnam, the U.S., Canada, Russia, Peru, and Chile, among others.)

Free trade is a hot topic right now, with the dreaded “P” word floating about: protectionism. Protectionism is when governments restrict or restrain international trade. Most times the intent is to protect local markets from competition.

Like if the U.S. government says a tomato farmer in Mexico can no longer export his product to the States because its so much cheaper compared to an American farmer’s product.

The 21 leaders meeting in Lima have agreed to “avoid protectionist measures and keep trade free despite the economic climate,” reports the BBC. The members signed a final declaration backing free trade on Monday.

Free trade is only part of the equation, though, and governments have also agreed to support economic stimulus plans that will boost spending.

In fact, the APEC member governments are spending hundreds of billions of dollars on ways to stop the economic crisis, says the International Herald Tribune. Not all the cards are on the table, though, and there hasn’t been a clear-cut plan held up for the public’s eye. Not yet, anyway.

One thing is for sure… There will be a lot of international cooperation to spur investment and partner economies. For example, 40% of Chile’s exports went to the Asia-Pacific region in 2007. Mostly to China.

It’s no surprise that Chile was the first non-Asian country to sign a free trade agreement with China back in 2005. And China just last week signed an FTA with Peru.

These FTAs allow for easier, cheaper trade, which may ultimately keep some of these countries out of a recession.

By the way, we’ve just gotten a GDP report from Chile’s Central Bank. For the first nine months of 2008, Chile’s GDP growth rate was a brisk 4.2%. Now, that’s down from last year’s figure (at 4.7%), but still pretty darn good.

Next year, the country expects a bit of contraction, and only 2% to 3% growth, but that’s good enough to keep Chile out of a recession next year.

That’s also good enough to keep Chilean businesses fairly healthy.

Source: Investing in Latin America: Global Crisis Buffer

More from Fleet Street Daily:

Let’s have a think about what’s going to happen after the downturn (it may seem hard to believe right now, but there will be an after the downturn). What will the world look like?

The answer will depend on what the jury decides in what is the most important trial of our times: Man versus Capitalism. The outlook for Capitalism isn’t good…

As Ambrose Evans-Pritchard writes in today’s Telegraph:

‘At this point I have given up hoping that we will draw the right conclusions from this crisis. The universal verdict is that capitalism has run amok.’

So what will the world look like after the guilty verdict is in? Let’s get ball rolling with three predictions about what the future global economy will look like:

1. The state will play a much larger role

This is pretty much nailed on already. Governments have already gone beyond being Lenders of Last Resort. Here in Britain, the government is buying into the banks directly.

It won’t stop there, either. Economies are shrinking and people are losing jobs. Governments will do whatever they can to minimise the damage, including giving people jobs directly. It would be political suicide not to.

2. Capital will be allocated less efficiently

For investors, this is the biggy. The prevailing “wisdom” has it that bankers are reckless mercenaries who throw money at ludicrously risky propositions in the hope of receiving a fat bonus before the whole thing blows up in their employer’s face.

While there may be an element of truth in that, let’s not get carried away. Banks exist to make money, and, by and large, it’s in their interests to lend where the return will be highest — while keeping risk to an acceptable level, of course. But that ‘acceptable level’ is now being redefined.

We will see tighter regulation of financial institutions. We could also see governments morph into reluctant banks managers as they attempt to keep the system on its feet. If this happens, expect lending decisions to be taking for political motives rather than profit motives. That is to say, the most profitable businesses — the ones that would deliver the most economic growth — will not necessarily be the ones that are funded.

Businesses that ten years ago would have had no problem getting a loan — and, crucially, that would have used that loan to fund profitable enterprises — will find it harder to get funds. As such, they will find it harder to grow, and shareholders will suffer.

To cut a long story short — the world of the future will be a harder place to make money.

3. Protectionism will end dollar hegemony

To be honest, there’s loads of culprits I could choose when I’m playing the Who Will Knife The Dollar game. But I’ve got this sneaking suspicion — call it a hunch — that protectionism will be the catalyst. Let me explain.

Whoever wins the US Presidential election, America is in big trouble. It will be hard to resist calls to whack up tariff barriers, and protect domestic jobs from foreign competition. A weakening dollar may help US exports a bit… but the US is in a bind.

If the dollar falls too much, foreign dollar holders (eg China and the oil-rich Gulf nations) will start dumping it. The US does well out of being the world’s reserve currency. Such a move would threaten that.

So what will the US do? It could pursue a strong dollar policy (I’m not sure how, but we’ll gloss over that here!). But that would hit exporters, and hit jobs. So, in response, some bright spark will start banging the drum for protectionism.

In desperation, the US government will reach for the lifeline. Foreigners who sell goods to Americans will suddenly find their access to the world’s biggest consumer market has been severely curtailed. Bad for them… but bad for America, too.

You see, those foreign dollar holders can see the currency’s fundamentals are weak. They’re sitting on all this money whose value is in the hands of a monetary authority (the Fed) and a government whose sole concern right now is fighting the downturn. The Fed has slashed rates, and there’s a strong chance the printing presses will soon go into overdrive.

So why are foreign dollar holders playing ball? Because, as things stand, it’s still in their interests to do so. Why would they want to antagonise a nation they do so much business with? Why would they impoverish their best customers?

But throw protectionism into the equation, and the incentives change. This is particularly true in the case of goods exporters like China. Overnight, the US market is less important to them.
Now, will this be enough to tip the balance? Will it reduce their incentive to co-operate enough so that they take their ball back and stop playing? Hard to say… but I think we’re going to find out.

One thing at a time… we need to get there first

Those are my three predictions for today. But many moons will pass through the night sky before this whole thing turns around. For now, we must do two things. We must prepare, and we must protect.

Source: Man Vs Capitalism – The World After The Downturn…

“The EU should be working with the United States to promote new technologies, not finding protectionist gimmicks to apply new duties to these products,” US Trade Representative Susan Schwab said to Thomson Reuters.

“Investors may have fled the US dollar, and watched the eurozone grow relatively fast against its lagging American counterpart,” says Jody Clark in Money Week, “but they’ve ignored the hidden weaknesses on this side of the Atlantic.

“This year’s first-quarter GDP growth across the eurozone flipped up a good 0.7%, but that figure was skewed upwards by the rollicking performance of the German economy. German GDP growth climbed 1.5% on the back of a roaring manufacturing base oiled by booming exports. In contrast, Italy only managed expansion of 0.4% and Spain 0.3%, while in Portugal, growth actually fell by 0.2%.

“Meanwhile, inflation is on the rise, led by a good 4.6% in Spain and 5% in Ireland. Both are well outside the ECB’s 2% target. The spectre of stagflation – a stagnant economy plus rising inflation – is rearing its ugly head. Indeed, ’stagflation is a situation that we experienced some years ago, it could return,’ said Spain’s Economy Minister Pedro Solbes earlier this month.”

The US should get its house in order too, says Chuck Butler in The Daily Reckoning.

“The currency markets do not like any form of protectionism, and a country that puts protectionism in place usually sees the currency suffer.

“So, think about this for a minute… We have an election process going on in the United States that will come to a head in November, which is six months away. During that six months there will be candidates taking shots at OPEC and China (the two main ‘outside’ culprits of the trade deficit… But we would never go after the US consumer and tell him to save instead of spend now would we?)”