Monday, February 09, 2009

The Danger to Free Trade

Last Friday, the Wall Street Journal ran one of the scarier articles I've read in quite some time. In short, according to the article, "Countries grappling with global recession have enacted a wave of barriers to world commerce since early last month, scrambling to safeguard their key industries -- often by damaging those of their neighbors."

The details:

Russia has introduced 28 measures to raise tariffs on other countries' imports and subsidize its own exports since November, and plans six more.

It's not alone. The European Union has warned the U.S. that proposed "Buy American" provisions in planned stimulus spending could break trade rules. Meanwhile, EU nations have reversed direction and tightened their own trade rules, for instance by resuming subsidies to dairy farmers' exports and effectively barring Chinese screws and bolts from their market, while accusing China of dumping them below cost.

The U.S. is planning retaliatory tariffs on Italian water and French cheese to punish the EU for restricting imports of U.S. chicken and beef. India is proposing to increase tariffs on foreign steel at the request of its steel industry.

The landscape is moving so fast that officials at the WTO, the world's top trade-law enforcer, say they're relying on news reports to keep up with the changes, as governments are often slow to report them. They are reconsidering their Jan. 23 report that concluded protectionist pressures were largely being kept at bay.

Among the changes just since that finding: Egypt has imposed duties on sugar, and the U.S. has levied new tariffs on Chinese goods it contends are being dumped on the market, including mattress springs and graphite electrodes, used to conduct electricity in factory furnaces.

The WTO's figures show that antidumping cases overall, in which nations contend others are disrupting markets by unloading goods below cost, are up 40% since a year ago. In October, as the extent of the global recession became more certain, WTO director Pascal Lamy ordered his staff to start tracking protective actions, say WTO officials.

This is very scary ground we're treading on here. Free trade is subject to massive collective action problems that make these kinds of protectionist responses to crises very attractive. And the implementation of trade barriers can take on a spiral dynamic as one aggrieved party acts to protect its own industries and punish another state for its actions. In the 1920s and 1930s, such "beggar-thy-neighbor" policies undoubtedly worsened the impact and length of the Great Depression and led to a 66% contraction in global trade that contributed to the collapse of the German economy and the rise of Nazi Germany.

Is such an outcome possible today? The Wall Street Journal article doesn't seem to think so:

Economists and trade analysts say the current rash of trade constraints could make it harder for global economic growth to recover from the current downturn. Global trade is expected to shrink by more than 2.1% this year after growing by 6.2% in 2008, according to the WTO.

To be sure, the current growth of protectionism is different and less sweeping than the trade wars of the 1930s. "It's a creeping form of protectionism," said Frederik Erixon, director of ECIPE, a trade-policy think tank based in Brussels. By comparison, the Smoot-Hawley act in 1930 raised U.S. tariffs on foreign imports by an average of 20% across the board. "That could never happen now," Mr. Erixon said. "Political leaders agree it's illegal and immoral."

It's true we're a long way from the 20% tariff increases of Smoot-Hawley. But I don't put much faith in the legal and moral impulses of our political leaders. Just look at the idiotic "Buy American" language contained in the US stimulus package.

It is vital that in a time of economic fears and rising worries over trade that the US send a strong message to the international community of its own commitment to free trade. By backing away from the "Buy American" language, the US can help stop the justifications being used by other countries to protect their own industries and do what is best for the American economy. But American action needs to go beyond that. President Obama must push to stop these anti-dumping actions and to reestablish the norm of free trade. If he doesn't, we're in for some longer, harder times.

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