The US and EU are putting up more protectionist barriers. So why do we go along with the hypocrisy of free markets and free trade?

There is something ludicrous about the rage and horror that has gripped Americans in recent days, all over the $165 million in bonuses paid to top executives of AIG, the failed insurance giant.

Ordinary folk, every newspaper and TV channel in the country, Congressmen (including the ones who were screaming for bank bailouts during 2008) and even people on the Wall Street (what an irony!) are furious that AIG should be paying some of its executives handsome bonuses while on the dole.

All this sound and fury comes across as more than odd because there was little of this outrage when AIG was given $175 billion for the mess it had made of its business through speculative trades and 'innovative products'. Nor was much of it in evidence when the government was debating and finally passing the nearly trillion dollars in bailouts.

The details of the AIG bailout that have been made public, reluctantly, by the government focus the spotlight more clearly on the faults of the system as a whole.  The insurance behemoth's counter-parties who will benefit from the rescue package are Goldman Sachs, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank and Barclays among others, all of which were given huge infusions of funds under the Troubled Assets Reform Programme. Hence the heightened indignation.

But given the free market's foundational encouragement of self-interest, it was decidedly odd that Americans were shocked by the discovery of self-serving greed in the financial sector. It's possible that Americans suffer from acute amnesia or that they do not learn from history.

The periodic crises of recent decades, from the crash of 1987 to the demise of Long-Term Capital Management -- a hedge fund company set up by a couple of Nobel laureates, should have prepared them for the 'too big to fail' syndrome.

In other words, the basic principle of the free market, that companies which do not make the cut should be allowed to fail, is seldom applied in the capitalist system.

The argument for bailouts that is made in all these cases is that the global financial system would collapse otherwise. In simple terms it means the system is far too vulnerable to the machinations of the big boys.

Such machinations are also becoming increasingly manifest in the global trade system, too, where the big boys are getting together to impose a brazenly protectionist regime on the rest of the world. 

As the financial meltdown begins to choke their economies, the US and Europe, the world's largest trading blocs, are coming up with increasingly tough barriers to protect their turf, barriers that will force developing nations to pay the bigger price for the global crisis.

Many of the protectionist measures are innovative, as innovative as the derivatives dreamed up by Banque AIG and AIG Financial Products, and will accentuate the huge imbalances that are inherent in the world trading system despite decades of negotiations to arrive at a fairer arrangement.

If anything, the World Trade Organisation has made the prospect of a level playing field recede even further.  At a time when there is need to seek ways out of the morass, rich nations have been engaged in throwing up a minefield of tariff and non-tariff barriers at amazing rapidity, a phenomenon that should not come as a surprise to the Third World which is familiar with the hypocrisies of the trading system.

In just four months since the G20 nations pledged at their Washington summit in November last year not to raise new barriers to trade and investment, an amazing number of restrictions have come up. A study by the International Trade Department of the World Bank lists 47 new measures that restrict trade, many of these from 17 members of the G20.

The US, which has riled even its closest trade partners with President Barack Obama's 'buy American' policy, has been the most brazen in erecting new trade barriers.

Here's the latest example. On March 11, Obama signed a spending bill in which was embedded a lethal clause aimed at curbing imports from Mexico. The clause prohibits funds from being used to "implement, continue, promote, or in any way permit" a programme that was being run on a pilot basis to allow a few Mexican trucks to operate in the US. The tragedy is that under the NAFTA agreement, Mexican trucks were supposed to be operating freely across the US by 2000.

This is all of a piece with the free trade agreements that are negotiated by developed countries. The benefits that ought to come to the developing country partner are invariably back-loaded or delayed inordinately.

As a response to the latest provocation of the US, Mexican President Felipe Calderon has slapped tariffs amounting to $2.4 billion on US imports, but given the fragile state of Mexico's economy these tariffs, analysts say, may prove counter-productive for America's decidedly poor neighbour. It would probably be forced to backtrack.

The most egregious of the trade barriers that are coming out of the West's bag of trade tricks is the proposal for an environment tax on countries such as China and India, ostensibly to force them to fall in line on cutting greenhouse emissions.

However, the levels have been set by the developed nations, which have shown little willingness or ability to reduce their emissions except through carbon credits gained by exporting the problem to the Third World.

The proposed tax will be a double whammy for India, which, admittedly, needs to cut down its emission levels. But to have it imposed as a condition of trade at a time of shrinking global markets is neither fair nor justified.

The larger point here is whether rich nations, which have increased their emission by 20-40 per cent since 1990, can be allowed to get away with such double standards.

The greater problem with such barriers is that they are likely to prove toxic and remain in place for decades to come just like AIG products which have a life span of up to 90 years and are spread across different markets and different systems.

Can countries like China and India come up with an alternative to the bad morality and the bad economics of protectionism? Or are they likely to be sucked deeper into the blatant hypocrisies of a skewed system that offers no solution to the economic or environmental sustainability of the planet?