Rise of Nationalism Frays Global Ties

[R.A. Hettinga]

<http://online.wsj.com/article_print/SB120934738145948747.html>


April 28, 2008


Rise of Nationalism
Frays Global Ties
Trade, Environment
Face New Threats;
Balkanized Internet
By BOB DAVIS
April 28, 2008; Page A1

The world isn't as flat as it used to be.

During the long march toward globalization, international borders and
trade barriers came down. Communism fell. Protectionist walls in Latin
America and elsewhere were dismantled. Governments -- long prone to
meddling in trade -- took a back seat to broader market forces.

In a globalization manifesto, New York Times columnist Thomas Friedman
declared that the Internet and other planet-spanning technologies were
erasing national boundaries. The world, he said in a 2005 best seller,
was flat.

No longer. The global economy appears to be entering an epoch in which
governments are reasserting their role in the lives of individuals and
businesses. Once again, barriers are rising. Call it the new
nationalism.

"The era of easy globalization is certainly over," says Pulitzer Prize-
winning author Daniel Yergin, whose 1998 book, "The Commanding
Heights," detailed the triumph of markets over nations, starting with
British deregulation under Margaret Thatcher. "The power of the state
is reasserting itself."

Just a decade ago, Asia, Latin America and Russia were on financial
life support from the International Monetary Fund and World Bank. The
U.S. was planning yet another round of global trade negotiations. The
European Union was writing a constitution to shift power to Brussels
from member nations.

Now borrowers shun the IMF and World Bank. Trade talks are shelved.
Barriers to foreign investment are rising around the world. State-
owned companies are expanding, particularly in oil and gas. Public
support of immigration restrictions is growing in countries from the
U.S. to India.

A CHANGED WORLD

 On the Wane: Say adios to the 'flat' world marked by multilateralism
and deregulation.
 New Reality: National barriers have risen as states increase control
over resources, boost protectionism, and even seek borders on the
World Wide Web.
 What It Means: Amid a globalization backlash, expect increased
resistance to immigration and more difficulty reaching global
environmental accords.

The rising influence of governments can be seen in massive state-
funded investment pools, many backed by countries that were reeling
financially a decade ago. Sovereign wealth funds from Asia and the
Middle East are now propping up wobbly financial institutions in the
U.S. and Europe, and may hunt next for real-estate bargains. The
growth of state power may also serve to make dealing with global
climate change -- the most borderless of all issues -- even more
difficult.

Security Concerns

What accounts for governments' bigger role? The terrorist attacks of
Sept. 11, 2001, refocused the world on security concerns that can be
addressed only by national governments. Countries enriched by the
commodity boom are increasingly asserting their power, with Venezuela
nationalizing oil fields and Russia threatening to cut off natural-gas
supplies to Western Europe. A backlash against economic integration
has also pressured national governments to retreat from
multilateralism: Big pluralities in 21 of 34 nations polled by BBC
World Service in December said the "pace of economic globalization" is
moving too quickly.

The changes don't presage an era of full-blown protectionism. The 15
countries that have shared the euro since 1999 will, despite
occasional grumbling, continue to do so. Governments continue to obey
rulings by the World Trade Organization, even if they must rewrite
their own laws to comply. Mr. Friedman, the flat-world theorist, says
that the reassertion of state power may turn out to be an "episode"
rather than a trend, and that technologies will continue to empower
individuals across boundaries.

Even so, there are mounting indications that governments are on the
ascendant.

National boundaries are going up even on the Internet, the emblem of
the borderless world. The Internet was designed to be beyond the reach
of governments, shifting power to individuals or private organizations.
Now, pressured by Russia, China, India and Saudi Arabia, the U.S.
company that assigns Internet addresses is working on ways for
countries to use characters from their home languages. The
familiar .org, .com and country codes in Web addresses will be
replaced with their equivalents in Chinese, Hindi and many other
languages.

While that should help locals navigate the Web, it would also put many
sites behind curtains to users from abroad. That would spell the end
of the days when anyone with a keyboard that produces Latin letters
can see sites in any land -- essentially taking the "world wide" out
of the World Wide Web.

"We're facing a step-by-step Balkanization of the global Internet,"
says Columbia University law professor Tim Wu. "It's becoming a series
of national networks."

The rising strength of national governments expresses itself in
different ways. For rich countries, it generally means higher taxes
and more regulation. In the 30 mostly rich countries of the
Organization for Economic Cooperation and Development, tax revenue as
a percentage of the local economy was higher in 2005, the latest year
surveyed, than a decade earlier. That's because of the rising cost to
governments of health care and social security.

In the U.S., the severity and scope of the current financial crisis
has eroded the case for letting markets operate with ever-lower
government guard rails. The current question is not whether regulation
will increase, but by how much. All three presidential candidates say
they would pass tougher financial-market regulation and would also
boost government programs to retrain workers battered by the global
economy.

In rich and poor countries alike, immigration has become a powerful
political issue, as improved transportation makes it easier for people
to move across borders and compete for jobs with locals. There are
backlashes against Burmese in India, Haitians throughout the
Caribbean, Bolivians in Argentina and Zimbabweans in South Africa. In
44 of 47 countries polled by Pew Research Center last fall, majorities
supported further restrictions on immigration.

In poorer countries of Africa and Asia, meanwhile, rising global food
prices are prompting governments to erect new export barriers. "There
is no place in the world that grows the food we need if we're forced
to import," says India's finance minister, P. Chidambaram. "Therefore
we have to be nearly self-sufficient in all food items."

Growing Influence

Capitals that once had little sway on the global scene now have a lot.
The influence of Brazil, for example, has grown along with its
economy. A week after WTO trade talks collapsed in July 2006, U.S.
Trade Representative Susan Schwab jetted to Brasilia to confer with
the country's foreign minister, Celso Amorim, who also handles trade
issues.

Mr. Amorim has become an unlikely power broker in the bid to wrap up
the negotiations, which began in 2001. The talks broadly involve a
prospective deal: The U.S. and Europe would slash agricultural
subsidies if developing nations would lower their tariffs for
industrial goods and broaden foreign financial firms' access to their
markets.

In the past, developing nations essentially ratified global trade
deals negotiated by the U.S. and Europe. But Brazil, India and China
are no longer following that script. Mr. Amorim has put together a
group of 20 developing nations that want to limit market openings at
home while pressing for agricultural liberalization abroad. Their
assent is essential to reaching a deal. So far they have withheld it.
"Brazil holds the key to getting this done," says Ms. Schwab.

'It Was a Party'

Citizens of poor countries feel exhilarated by their governments' new
power. In Rio de Janeiro, Maria Aparecida Lemos, an AIDS patient who
lost her sight, says she "celebrated like it was a party" last year
when Brazil's president voided a Merck & Co. patent on an AIDS drug. A
Brazilian company now makes the drug, Efavirenz, for a fraction of
what Merck was charging. Under global trade rules, developing
countries have the right to override patents in emergencies, but few
had done so for fear of retaliation.

Merck says it had already reduced the price of Efavirenz and was
willing to cut further, but not enough to satisfy Brasilia. "Brazil
may not be the kind of place you want to invest in," says Jeffrey
Sturchio, Merck's vice president for corporate responsibility.
Brazilian officials shrug off such threats, figuring the country's
growing wealth makes it a magnet for investment.

Energy companies have been among the first to feel the new
nationalism. Since oil prices started rising in 2004, Russia,
Venezuela, Bolivia and Ecuador have nationalized foreign-owned oil
assets, the first big wave of nationalization since the 1970s. After
Venezuela's state-owned oil firm doubled its ownership of heavy-oil
projects along the Orinoco River last year, ConocoPhillips pulled out,
taking a $4.5 billion charge. Exxon Mobil Corp. left as well, and is
suing Venezuela for compensation.

Growing petro-nationalism has prompted Royal Dutch Shell PLC to change
the global scenarios its economists create to help the company plot
its next moves. In the 1990s, Shell's scenarios assumed government
power was diminishing. The company invested heavily in Russia's
Sakhalin oil fields, assuming it would see minimal interference. But
as the Kremlin tightened its grip on the energy sector, Shell was
forced to sell half of its stake in the project to Russia's state-
owned OAO Gazprom.

In this decade's models, governments play a more central role. One of
Shell's two current scenarios envisions that government dominion over
resources -- nearly 80% of world oil reserves are controlled by state-
owned firms -- will continue. In the other model, governments are
still at the center of decision making but recognize a common interest
and agree to address climate change, says Jeremy Bentham, Shell's vice
president for global business environment.

Recognizing the powerful role of state-owned oil companies, Shell is
investing heavily in unconventional oil sources, many of which have
little prospect of expropriation. It recently announced a $10 billion
expansion plan in the tar sands of Canada. It has also increased its
focus on biofuels made from, among other things, algae and wood chips.

Pitney Bowes Inc., a postal-machine maker in Stamford, Conn., is also
trying to adapt. Over the past decade or so, it had moved a lot of its
production to China. It also had outsourced back-office computer
operations to India.

But more recently, the company has started worrying about the security
of those supply lines. "We're always concerned that the nationalists
there will come and take over" our suppliers in China, says Cynthia
Schmitt, the company's vice president for enterprise risk management.

So over the past three years, the company and its overseas suppliers
have begun stockpiling more postage-machine components. Pitney Bowes
also began insisting that its vendors in India have backup servers in
other countries. So many U.S. companies do business in Bangalore and
other Indian cities, Ms. Schmitt fears they could become terrorist
targets.

Similar concerns are felt by other big companies. AMR Research Inc., a
Boston consulting firm, says it surveyed supply-chain managers at big
U.S. firms in March about how they would rank the risks they face
doing business globally. About 30% of them rated "country risk" --
geopolitical problems or natural disasters -- as their most significant.

Some companies are seeking havens closer to home. As some U.S.
corporations relocate operations from lower-cost spots in Asia, Mexico
-- which has a free-trade pact with the U.S. -- has seen a surge in
foreign investment, up 21% last year to $23.2 billion.

Some of the world's biggest new investors are government-run
investment funds. In the Middle East and Russia, sovereign wealth
funds are powered by oil revenue; in Asia, they're fed by other export
earnings. In all, the funds have a total of $3 trillion in revenue and
have used the money to buy stakes in Citigroup Inc., Merrill Lynch &
Co. and other battered Wall Street firms. While the infusions have
been lauded by the U.S. Treasury and capital-short Wall Street firms,
they also aroused suspicions here and internationally that the
investors could have political agendas.

Now, many national governments are raising barriers against such
foreign investment. The U.S., Canada, Germany, France, Japan, South
Korea, Australia, Hungary and Greece are proposing or enacting
restrictions on investment by state-owned firms from other countries,
according to a forthcoming study by the Council of Foreign Relations.
China and Russia, which have sovereign wealth funds, are staking out
"strategic sectors" where foreign investment would be restricted, say
the study's authors, investment-law specialist David Marchick and
Dartmouth economist Matthew Slaughter.

National Muscle-Flexing

Muscle-flexing by national governments has also made it more
complicated to tackle global environmental issues. In 1987,
governments sent environmental ministers to Montreal to negotiate a
global ban on the chlorofluorocarbons blamed for opening an ozone hole
over Antarctica. The ministers expected the treaty would be ratified
at home and enforced world-wide through trade sanctions. It was.

A decade later, the Kyoto Protocol flopped because the U.S. didn't
sign, and China and India weren't required to limit emissions. Now,
with national governments wary of making commitments, negotiators and
think tanks in the U.S. and Europe are grappling with how to persuade
states to take strong efforts to curtail greenhouse-gas emissions. One
possibility: encourage governments to take specific actions to cut
emissions now, and hold off on a treaty until states are more
confident that their rivals are taking global warming seriously.

New nationalism could play out over a lengthy span, says Michael
Klein, chief economist at the World Bank's private-sector arm, the
International Finance Corp. "Disparate national interests may pull
[countries] in different directions and render global actions more
difficult," Mr. Klein says. "We're in for several decades of these
centrifugal forces."