The international economy faces a year of living dangerously. When the world awakes on New Year’s Day, the hangover that many of us may be suffering will be a minor worry alongside the collective headache inflicted by the cocktail of threats menacing the global outlook.

Yet as governments, central banks, and the rest of us fret over the nasty lineup of inescapable challenges that imperil prospects for the coming year, a large, additional, but easily avoidable danger also now looms.

The US housing slump, soaring oil prices, the global credit squeeze, and a downturn in Britain’s housing market are among the slew of worrying realities we cannot evade. But there is also a growing risk that the world’s big economies will seriously aggravate the pain they already face with a damaging retreat into the folly of protectionism.

This would pile additional, unnecessary and self-inflicted misery on top of the woes that the global economy must suffer next year. Yet the risk that politicians in the United States or Europe will foolishly take just such a turn in coming months, throwing up new and damaging barriers to international trade, is as real as it is under-remarked.

Since the start of the decade, the continuation and development of global free trade in goods and services has been under threat from two main factors.

First, the persistent failure of negotiators from the world’s big economic blocs to make significant, real headway in the “Doha round” of international trade talks launched in 2001, which have remained deadlocked and beset by intransigence and acrimony.

At the same time, trade tensions between the US and Europe on the one hand, and a resurgent China on the other, have mounted alongside Western paranoia that a burgeoning Chinese economy will devour our jobs and prosperity.

As fear of the rapidly emerging economic power of China has grown in the West’s popular imagination, so politicians, especially in Washington, have increasingly pandered to protectionist sentiment.

Now, though, the danger is that both of these threats to the world’s commitment to a liberal international trading regime may be greatly magnified by next year’s impending downturn in economies across the developed world in general, and in the US in particular.

Despite the hopes of Pascal Lamy, the World Trade Organisation’s long-suffering Director-General - who has the thankless task of overseeing the Doha talks – for a global deal finally to be clinched in 2008, it is hard for most observers to be optimistic.

The circumstances hardly look promising for a breakthrough next year in the perpetually log-jammed negotiations that remain as mired in finger-pointing by the key negotiating powers as they are stuck in stalemate. The last few months have seen sabre-rattling over trade between China and the US and Europe escalate. The crucial “fast-track” authority of President Bush to ask the US Congress to give a straight thumbs up or down to any final trade agreement – seen as vital to securing essential Congressional approval for a deal – has run out.

All is still by no means lost. Trade officials are now holding renewed talks based on proposals set out in July aimed at forming a basis for bridging divisions between the big trading blocs in the two key areas, trade in agriculture and in nonfarm goods.

Yet the already substantial odds that the WTO round will collapse, in what would be a disastrous setback for free trade, can only be multiplied by the imminent downturn in the American economy, with the real risk that it may tip into recession, and what will probably also be a significant slowdown in Europe, too.

In these conditions, it is all too plausible that rattled politicians on both sides of the Atlantic will succumb to the temptation of populist protectionism, with China an easy scapegoat for rising unemployment in the West, and the Doha round a likely casualty from the diplomatic collateral damage.

These dangers are inevitably greatest in the United States, where the febrile political atmosphere of next year’s most wide-open presidential election race for 80 years is bound to combine with increasingly grim economic conditions to lure at least some American politicians into stoking protectionist sentiment. The pressures will only be heightened by developments such as the recent sight of China bailing out revered Wall Street institutions. Even those political leaders committed to free trade will no doubt find it easier to avoid making that case in a climate that will offer plenty of other issues to campaign on.

Why is all this so important? Surely a few extra impediments to free trade should be the least of our worries in what looks such a testing year for the world economy?

The reality is that just as the last serious outbreak of protectionism in the Thirties was a driving force behind the Great Depression of that bleak era, so in the postwar period, the steady expansion of liberalisation in successive free trade rounds has been a motor for the strong global growth that has driven increased prosperity around the world – first mainly for the developed world and more recently for the poorest nations.

In the tough times ahead, we forget these truths at our peril. Even as they grapple with the big economic challenges of the coming year, it will be vital that our leaders remember them. They must strive for a successful conclusion to the Doha talks. And they must confront, rather than appease, those who peddle mercantilist nonsense that presents trade as a zero-sum game in which the West is the loser. A retreat into protectionism will risk turning the coming economic crunch into a crisis, if not a catastrophe.

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