June 08, 2018

Consumption and protectionism

Management comment

As protectionist measures and customs tariffs are blooming like poppies in a field of alfalfa, it may be of use to reflect on the founding principles of protectionism. The German economist Friedrich List, who was a fierce opponent of Adam Smith, perceived protectionism as a transitory period enabling national companies to adapt to international competition, which he referred to as “educating protectionism”. Moreover, this is probably the philosophy underlying the Chinese system involving the transfer of technology, limiting capitalistic implantation to joint-ventures and forcing the repatriation of profits outside of China for foreign companies.

The US protectionist response is not the fruit of “educating protectionism” however. In reaction to China’s increasing dominance, it aims to oblige US trading partners to return added-value to their home country and enable America Inc. to penetrate other economic regions more deeply. It is difficult to see the benefits for the global economy which functions on the two pillars: consumption and the free movement of goods and individuals. Consumers will effectively be the main losers under protectionism as the price of goods and services will be higher and their access will become more restricted. Consumption is the keystone for the so-called liberal economies however. Moreover, the status of the consumer is often confused with the status of the citizen. China, with 40% of GDP depending on consumption (vs 36% in 2008), is now following the same trends as capitalist economies. A recent McKinsey report on Chinese consumer habits revealed that, like US or European consumers, Chinese millennials will be the standard-bearers of wealth-creation and the new growth drivers in the medium term.

Happiness-seekers, spendthrifts and success-seekers are now global profiles driving consumer modes in luxury goods, digitalisation, comfort, mobility, tourism, sport and healthcare sectors. Meanwhile the people, who have been deeply disturbed and culturally shaken by globalisation and the virtualisation of the world, are facing a dilemma: consumption or protection. In their votes cast (USA, UK, and Italy) they have more or less consciously expressed the need and desire for both, as well as anxiety over losing them. However, these two objectives are sometimes difficult to reconcile at the same time and without making sacrifices.

Investors now also have to adopt a more agile approach within this new contrasting paradox and perhaps accept forfeiting some of their performance in exchange for better risk control.

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in June 8th, 2018.

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As protectionist measures and customs tariffs are blooming like poppies in a field of alfalfa, it may be of use to reflect on the founding principles of protectionism. The German economist Friedrich List, who was a fierce opponent of Adam Smith, perceived protectionism as a transitory period enabling national companies to adapt to international...
2018-06-08