The March rally in global equities has been underpinned by the massive policy response from governments around the world.   How ironic, then, that the very policies promoting global growth – fiscal spending, tax breaks, bank bailouts, etc. – could ultimately be diluted by government initiatives supportive of protectionism.

Protectionism has become a growth industry, with numerous nations – including the United States and a host in Europe – opting for various direct and indirect barriers to trade since the global financial meltdown of September 2008. The World Bank notes nearly 90 new restrictions on trade since October 2008. Of the G-20 nations, 17 countries have implemented some type of trade protectionism since pledging not to in November 2008. Recent trade infractions range from iron and steel tariffs in Russia, to massive automobile subsidies in the United States and Europe, to agricultural restrictions in Argentina and Brazil.

Everyone, or so it seems, is doing it, with China just the latest country to embrace a “buy local” platform. Beijing has introduced an explicit “Buy China” policy that requires government procurement to be focused only on Chinese products or services unless they are not available within the country or cannot be bought at a reasonable commercial price.   The new polices have sparked a sense of unease in Washington, but with the $787 billion U.S. fiscal stimulus package choked full of   “Buy American” provisions, the U.S. doesn’t have a leg to stand on when it comes to opposing “buy China” initiatives.

What’s more, the latest edicts from Beijing are notably worrisome since they emanate from one of the strongest economies in the world. If China – with an economy expanding at an annual rate of roughly 7% – feels the need to opt for blatant protectionism to mollify worker discontent, think of the mounting pressures on states and governments whose economies have sunk deep into recession.

Against this backdrop, a dangerous new world of de-globalization may loom on the horizon.   This would be a world where trade flows are restricted, cross border investment is inhibited and industrial policies that favor domestic firms at the expense of imports and foreign competition take precedent.

De-globalization would leave consumers paying higher prices for imported goods, while making it harder for multinationals to access foreign resources and markets, boosting their costs and dampening future earnings. Global supply chains are at risk of fragmenting at huge costs to firms whose production networks are spread all over the world. Many developing nations would suffer from a structural decline in remittances as workers who once toiled in the developed nations or the oil-rich states of the Middle East are permanently sent packing.   The upshot:   a shackled global economy growing a much slower pace of growth than in previous decades.

Many fear de-globalization has already arrived, pointing to the recent collapse in global trade, the plunge in foreign direct investment, and the steep decline in global remittances.   These trends, though, are largely cyclical in nature and reflect a battered and bruised global economy that has slowed or halted the pace of virtually everything (capital, goods, services and people) that moves across borders.

The risks of de-globalization, however, should not be lightly dismissed. If history teaches us anything, it is that protectionism begets protectionism.   As the jobless ranks swell around the world in the coming months, the backlash against globalization will only grow.   The alternative may be de-globalization or the unbundling of a tightly wrapped global economy that has yielded widespread growth and prosperity for rich and poor nations alike.

This may sound far-fetched and alarmist.   But it wasn’t that long ago that U.S. sub prime loans were considered benign and contained to the United States.   These assumptions proved to be anything but.

The bull case for the global economy is premised on the belief that the worst is past – that the world is on the mend.   This assumption certainly has merit.   Yet the government-led global rebound could still be aborted by government-sponsored protectionism.

The views reflect the author’s and not the German Marshal Fund.   This article recently appeared as an Op-ed piece in the Financial Times.

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