“Specter of Smoot-Hawley?”

Sydney M. Williams

Thought of the Day

“Specter of Smoot-Hawley?”

June 25, 2012

Hard times arouse instincts for self preservation. That is as true for countries as it is for individuals. On Saturday, the New York Times reported, in a news item I have not seen elsewhere, that the World Trade Organization (WTO) said that, since October 2012, 124 new restrictive trade measures had been added by the twenty largest economies, affecting about one percent of world trade.

Earlier this year the WTO lowered their prediction for the growth of global trade to 3.7%, below the 5.0% level during 2011 and sharply below the pace in 2010 of 13.8%. (For comparison purposes, growth in global trade has averaged 6 percent since 1990.) These numbers are significant in that global trade of $18.2 trillion in 2011 represented 27.6% of global GDP. Pascal Lamy, the World Trade Organization’s director general, said in April, “The WTO has so far deterred economic nationalism.” But he did caution that with slower growth comes the risk that politicians might look inward and seek to make a scapegoat of trade, causing damage to the global economy.

Mr. Lamy’s fears are not far-fetched. For example, when the 407-page American Recovery and Investment Act of 2009 (the stimulus bill) was passed three years ago, it included a “Buy America” provision, which was later softened, but not removed. It is not unnatural for countries undergoing economic weakness (or, in the case of the U.S., abnormally slow recovery) to protect jobs at home, without regard to the negative longer-term consequences of their actions.

Europe’s financial plight has already slowed their economies to near-recession levels. Japan, last week, reported their first trade deficit with the European Union since the Finance Ministry began tracking data in 1979. Indicators in China suggest a moderation in their growth rates, while growth in the U.S. can best be described as anemic.

Trade is a difficult subject and the process of negotiating agreements moves like molasses. On paper, the concept seems obvious, but implementation is difficult. The inability of the WTO to complete the Doha Development Round of globally reducing trade barriers is an example. The Doha Round began in Doha, Qatar in November 2001 and after almost eleven years there is still no resolution. In a report to the WTO General Council a month ago, Mr. Lamy advocated “small steps” and rethinking those parts “where greater differences remained.” The Trans-Pacific Partnership will conduct its 13th round of negotiations in San Diego next month. In the U.S., it took three years for the President to agree to the free trade agreements with Panama, Colombia and South Korea negotiated by President Bush – and the agreement with Panama has yet to be implemented.

Trade is generally less important to mature economies than to developing ones (Germany and Japan being notable exceptions), but still critical. Trade comprises about 13% of our GDP, while it constitutes about 24% of the GDP for the BRIC nations. Nevertheless, as U.S. consumers gradually delever, increased trade will be important in terms of making up some of the shortfall – unless (God forbid) one expects government to continue to consume an ever increasing share of GDP.

Trade is a key part of a healthy global economy, but it is also important as it counters natural tendencies toward nationalism, often a consequence of tough economic times. All policy makers are mindful of avoiding the errors of 1930s protectionism, but the risk is that legislators become blind to incremental, tit-for-tat reactions. The Times quotes Michael Froman, assistant to the President for international economic affairs: “The record is actually rather good. The fact that major countries have taken actions that only affects such a small amount of trade in this environment – I think that’s quite positive.” But, like Carl Sandburg’s fog that surreptitiously “comes on little cat feet”, the trend, as the Times notes, does not look good. The reporter writes of Global Trade Alert, an independent trade organization: “It bumped up its estimate of the number of protectionist measures enacted in 2010 and 2011 by 36%, and warned that countries had many more coming.”

Despite its obvious benefits, free trade does have detractors. Special interests and unions being the biggest factors, with the former concerned about the effect of competitive pressures and the latter desirous of protecting jobs. Both have money to spend. Both want to preserve the status quo, despite being cognizant of the ever-changing nature that technology and productivity bring to business and labor. Change does not derive from hope; change is the child of necessity and the instrument of growth.

I am not predicting a return to Smoot-Hawley and its resultant isolationism in the U.S. and nationalism in Europe and Japan, but neither am I sanguine that protectionism will disappear without a whimper. Nationalism appeals to both the worst and the best of our emotional instincts. Patriotism is fine, but unfettered nationalism can cause fear, scapegoating, bigotry, and xenophobia. It pays to be vigilant.