Former President George W. Bush increased 300 tariffs in the final days of his administration; Congress successfully inserted "buy-America" provisions into the American Recovery and Reinvestment Act; French President Nicolas Sarkozy threatened to repatriate auto manufacturing from Eastern Europe; and UK Prime Minister Gordon Brown promised "British jobs for British workers." Desperate times often bring damaging measures. But protectionist acts will only further stifle world trade, thus lengthening and deepening the recession.
In Book IV, Chapter 2 of "The Wealth of Nations", Adam Smith makes clear his distaste for what the modern world calls protectionism: "To give the monopoly of the home-market to the produce of domestic industry...must, in almost all cases, be either a useless or a hurtful regulation." While G-20 nations and most other free-trading countries strive to meet the letter of international trade law, some appear to be skirting its spirit.
Indeed, the World Trade Organization regularly tracks "trade and trade-related measures," country by country. Its latest survey covered the September 2008 to March 2009 period, and pointed to more than 200 measures, often with multiple effects. Some of the actions are no doubt acceptable under WTO rules — and the organization says its listing "implies no judgment by the WTO Secretariat on whether or not such measure, or its intent, is protectionist in nature." But it is clear that, in many cases, the measures could limit imports.
Argentina, for example, introduced reference prices for "around 1,000 imported products considered sensitive," the WTO report states. State-sponsored reference pricing allows domestic companies to sell their goods at just below market prices, and is considered one of the basic non-tariff trade barriers.
The allure of protectionism is growing, the WTO says. "At the start of this year, most WTO members appeared to have successfully kept these pressures under control," according to most recent report from the director-general to the organization's Trade Policy Review Body. Now the barricades are going up, with higher tariffs, other restrictions, and anti-dumping actions on the rise. Although most stimulus bills "clearly favor the restoration of trade growth globally," several include trade-limiting government aid and subsidies, and various buying and hiring restrictions.
And as anti-trade measures pile up, "this will worsen the contraction of world trade and undermine confidence in an early and sustained recovery in global economic activity," the WTO says.
The world has experienced the misfortune of protectionism before. High tariffs didn't create the Great Depression, but they made it greater, making the downward spiral uncontrollable and unstoppable. Smoot-Hawley was a craven concession to the perceived public will, a pure play for votes. The law passed despite the failure of the Fordney-McCumber Tariff, enacted in 1922 to protect the American farmer. Fordney-McCumber greatly limited European agricultural imports. But overproduction eroded prices, and American farmers continued to suffer. So newly elected President Herbert Hoover raised tariffs even more. In no time other industries sought and were granted similar "protection," which was solidified by Smoot-Hawley in 1930.
An escalating imposition of retaliatory measures ensued amid already weakened economies, a self-destructive virus that strangled trade and was only wiped out by a world war.
"Clearly there's enough understanding that extreme trade wars can be destructive, and that's better than starting without that underlying belief," says David Levy, chairman and director of the Levy Forecasting Center. But the public grows impatient as the pain of recession intensifies. "It's difficult for politicians who want to stay in office — or alive, depending on their situation — too ignore the temptation," Levy observes. The G-20's defense of free trade is laudable. But when survival of key domestic industries is in doubt "it's natural to say we can't have all those cars coming into the U.S. The nature of the debate changes."
Levy calls the U.S. the "800-pound gorilla because the importer has more clout in this situation." Protectionism could "push a particular player to default," leading to a panicked, downward spiral. The global economy is in a delicate state: "Rattle it and it can break," he warns.
The 300 tariff hikes signed by President Bush complied with WTO rules, and the "buy-America" provisions in the stimulus bill were altered to the same effect. But Brown still stands behind his "British jobs for British workers" cry, and Sarkozy has not withdrawn his repatriation remarks. This protectionist stance may win them votes, but it will harm their economies.