Critics of bank bailouts generally focus on damage that the bailouts can cause for the financial system.
But the effect of bank bailouts on free trade represents another problem, said Pascal Lamy, head of the World Trade Organization.
The bailouts might hurt free trade because they are causing banks to shy away from the risk of operating overseas, he told the Financial Times.
“There is a danger that the finance industry will be on the side of the forces of de-globalization,” Lamy said.
The bailouts already have “constrained risk-taking” for banks beyond their domestic markets, which is hampering foreign direct investment, he said.
That investment is expected to drop 50 percent this year.
Lamy is concerned that the global recession will lead to general trade protectionism. “I am convinced the worst is yet to come,” he said.
“The real stress test is for the future, when the shrinking of economies translates into unemployment and social hardship, and that translates into a political reaction that could influence trade policy,’’ he said.
“The toolbox for protection is a wide one.”
Lamy isn’t the only one worried about protectionism.
Rich and poor countries alike are headed that way, said World Bank President Robert Zoellick.
"High-income countries have used subsidies for troubled industries, while low-income countries are using selective increases in border barriers," he told a WTO conference, Reuters reported.
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