British jobs Smoot-Hawley’s Ghost Appears as Economy Tanks: Michael R. Sesit

Who’s kidding whom?

Finance chiefs at last week’s Group of Seven meeting in Rome were busy congratulating one another for their collective skill in addressing the world’s economic problems and broadcasting their commitment to battling protectionism.
Truth be told, the global economy’s big nations -- as well as emerging-market ones -- are coming up short on both counts. Many are unilaterally adopting protectionist measures.
The rising protectionist tide hasn’t reached crisis proportions yet. But the camel’s nose is under the tent.
Unless governments get serious about arresting the trend soon, the chatter about 2009 morphing into a replay of the Great Depression will become a self-fulfilling prophesy. The U.S. Smoot-Hawley Tariff Act of 1930 increased duties on more than 20,000 goods, inviting retaliation by other countries. Within two years of the law’s enactment, global trade declined 70 percent.
The consequences of a trade war are ugly: reduced industrial production, rising unemployment, social unrest, stymied growth, shrunken profits and tumbling equity markets. There have already been protests or riots in Russia, Greece, China, the U.K., France, Latvia and Iceland.

End of Globalization
In short, everything the global economy is currently suffering from would be magnified. It might also spell the end of globalization, the first era of which began in the 1880s and ended with the outbreak of World War I in August 1914.
“An open system of global trade and investment is indispensable for global prosperity,” the G-7 said in its communiqué on Feb. 14. “The G-7 remains committed to avoiding protectionist measures, which would only exacerbate the downturn; to refraining from raising new barriers; and to working towards a quick and ambitious conclusion of the Doha Round.”
The sentiment is right. Unfortunately, the message is lost. First, the so-called Doha round of talks, which began in 2001, to ease trade restrictions on goods and services for the benefit of poor countries, are dead until the global economy emerges from its current crisis.
Second, not all governments are listening. “It’s unbelievable to blame France for protectionism,” French Budget Minister Eric Woerth said this week about government plans to aid automakers. “We need to protect our interests, our citizens, our companies.”

‘Buy American’
The U.S.’s $787 billion stimulus legislation contains a “Buy American” clause that stipulates that public works and building projects funded by the program use American-made goods, including iron and steel. U.S. Treasury Secretary Timothy Geithner has said America will comply with U.S. commitments to the World Trade Organization. Nonetheless, the Chinese are angry, the Europeans critical and the Canadians nervous.
French President Nicolas Sarkozy criticized French auto companies for outsourcing production to the Czech Republic. Italian Prime Minister Silvio Berlusconi, in announcing 2 billion euros ($2.5 billion) in rebates for trading in older cars and home appliances, said Indesit SpA should drop plans to close a dishwasher factory in Turin in favor of a site in Poland.
Russia has increased duties on automobile imports. China has re-established tax breaks for exporters. India has imposed limits on steel imports, and boosted soybean tariffs.
Defeating protectionism won’t be easy. Still, the battle must be engaged.

Too Valuable
-- Leaders must understand that international trade is too valuable a commodity to be used as a tool with which to get votes. During the campaign for the Democratic presidential nomination, U.S. President Barack Obama and Secretary of State Hillary Clinton both bashed the North American Free Trade Agreement.
U.K. Prime Minister Gordon Brown’s 2007 remark “British jobs for British workers” has returned to haunt him. When Pascal Lamy was European trade commissioner, he played to protectionist sentiment. As head of the WTO, he’s now singing another tune.
-- Countries with large foreign-exchange reserves should extend funds to the International Monetary Fund for lending to countries that lack access to global capital markets. Japan last week committed to providing the fund with $100 billion. But more can be done. China, Japan, Taiwan, India and the Organization of Petroleum Exporting Countries have a total of $3.95 trillion that can be put to work.

Trade Financing
-- Multilateral organizations, regional development institutions and major central banks should cooperate with private lenders to offer and guarantee trade financing. About 90 percent of world trade depends on some form of financing.
The volume of global trade will shrink 2.8 percent in 2009, after expanding 4.1 percent last year, the IMF estimated last month. Trade hasn’t contracted since 1982, the World Bank says.
-- The U.S. must lead the rest of the world in resisting protectionism’s temptations, and Obama must take the initiative. Congress won’t. It’s too beholden to the companies and labor groups that wrongly see protectionism as a solution to the country’s economic ills.
-- Complete the Doha talks. It would show that countries can cooperate on a common goal and that trade isn’t dead.
The best way to defeat protectionism is to resist our own worst impulses. That, though, seems beyond the ability of many politicians right now.


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