Page last updated at 23:36 GMT, Wednesday, 4 February 2009

The dangers of trade protectionism

unemployed men protest outsidde labour exchange

By James Melik
Business reporter, BBC World Service

A clause in the US economic package which President Barack Obama hopes to get approved by the Senate has raised fears that the world will revert to protectionist measures witnessed during the Great Depression of the 1930s.

The "Buy American" clause seeks to ensure that only US iron and steel are used in projects funded by the bill.

I don't think they want to take a protectionist route but the domestic pressures are so overwhelming that they are caught in kind of a Greek tragedy
Professor Jeffrey Garten, Yale School of Managment

Politicians and economists around the world have expressed concern, saying it is the worst signal that President Obama could send out.

"We know by experience that erecting obstacles to trade will make things worse," says Pascal Lamy, director-general of the World Trade Organisation (WTO).

"At times of global economic crisis, enemy number one is isolationism.

"Protectionism can only exacerbate the situation, as it did after the Great Wall Street Crash of 1929," he adds.

But a former US Treasury official warns that, for domestic political reasons, Mr Obama will have to back the Buy American clause to ensure his stimulus bill is passed by Congress.

Domino effect

In the l930s, tariffs soared to unprecedented levels as countries sought to protect their domestic markets.

In particular, in 1929 an ill-conceived tariff law was introduced to protect US farmers and industries.

Under the Smoot-Hawley tariff, duties of more than 60% percent were slapped on 3,200 imported products and by 1933 imports into the US had fallen from $4.4bn to $1.3 bn, while exports had decreased 69% over that same period.

The tariff law ignited a domino effect of retaliation and counter-retaliation among trading partners, which contributed to a severe contraction of international trade, decimated growth and drove up unemployment around the industrial world.

Although tariffs alone were not responsible for what became known as the Great Depression, they did nothing to resolve the fundamental issues brought about by a fixed exchange rate system anchored by the price of gold.

The depression had a devastating effect in virtually every country as international trade plunged by two-thirds, as did personal income, tax revenue, prices and profits.

Graphic: Decline of world trade 1929-33

At the depth of the depression, in 1933, one American worker in every four was out of a job - in other countries unemployment ranged between 15% and 25% percent of the labour force.

Those historical figures are fuelling fears that the world economy is spiralling into the abyss, but Professor Jeffrey Garten at the Yale School of Management says there are greater causes for concern.

He was Undersecretary of Commerce for International Trade during the Clinton presidency and says he is opposed to the inclusion of the "Buy American" clause- but he warns it may be a political necessity.

"If Obama took that clause out, he would have a very hard time getting the stimulus package approved and the US economy would really go into the tank," he told World Business News.

'Greek tragedy'

President Obama is not the only world leader who has expressed a need to protect workers at home - although he has since made it clear that he wants to avoid a trade war.

An eye for an eye makes the whole world blind
Mahatma Gandhi

Britain's Prime Minister Gordon Brown recently warned against the US bailing out its struggling automakers, arguing that global competition has made their decline irreversible.

He also promised British jobs for British workers - a slogan now being used by striking oil refinery workers about jobs being offered to Italian and Portuguese rivals.

"Whether you look at the US or the EU or China, the leaders are in an impossible position," Professor Garten says.

"I don't think they want to take a protectionist route but the domestic pressures are so overwhelming that they are caught in kind of a Greek tragedy."

He maintains that any one measure is not cataclysmic but, taken together, they could have a corrosive effect on global growth which is based so much on international trade.

There are worries that once cooperation in the trade arena breaks down, you are not very far away from non-cooperation on a lot of other issues.

"It could lead to a difficulty in dealing with issues such as incorporating countries like China, India and Brazil into the global economy," he says.

He also warns that a protectionist environment will hinder the restructuring of some of the world's major industries such as banking, autos, aircraft or telecommunications.

Trading therapy

There have been recent examples where an increased openness to trade, rather than protectionism, has been instrumental in helping economies recover.

During the Asian crisis in the late 1990s, the developing countries of the Pacific Rim increased their exports to rich countries by tens of billions of dollars.

"Those increased exports helped the Asian countries stabilize their economies and regain prosperity," Mr Lamy says.

"Trading their way out of the crisis was as vital to the countries of the Pacific Rim as the Marshall Plan was to Europe after World War II," he insists.

Most economists agree that raising barriers to trade in the midst of the worst global downturn in decades would be folly.

Mr Lamy quoted Mahatma Gandhi who said: "An eye for an eye makes the whole world blind," as he urged governments against sliding down the slippery slope of protectionist measures.

But there are an increasing number of aid packages for various sectors, a rising wave of anti-dumping actions, and more buy-national programs around the world.

In this era of globalisation, there seems little chance that the good times will be blowing anybody's way in the immediate future.

Tariff rates on selected articles, 1921 and 1930

Article 1921 1930
Raw sugar 1.25 cents/lb 2.5 cents/lb
Cattle free 3 cents/lb
Milk free 6.5 cents/gallon
Cream free 56.6 cents/gallon
Butter 2.5 cents/lb 14 cents/lb
Pig iron free $1.125/ton
Cotton free 7 cents/lb
Wool free 34 cents/lb



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