Saturday, March 28, 2009

Mr. Smoot, Meet Mr. Hawley

The Washington Post reports that the threat of trade protectionism is rising again as governments -- even industrial democracies -- retrench in the face of shrinking GDPs.

Egged on by fremescence around the globe, decisions aimed at reducing international trade will have, as they did in the 1930s, counterproductive results. The damage done by policies that restrict or deter trade among businesses and consumers across national boundaries will prolong the current recession.

Annys Shin wrote in the business section of Friday's Post:

In the latest WTO report, Director-General Pascal Lamy said that in just the past two months there has been "significant slippage" among the world's industrialized and developing nations toward protectionism. The report includes a lengthy list of examples.

"The danger today is of an incremental build-up of restrictions that could slowly strangle international trade and undercut the effectiveness of policies to boost aggregate demand and restore sustained growth globally," Lamy said.

A growing number of countries have raised tariffs, imposed import restrictions or reinstated subsidies. They have also been quick to defend home industries by filing complaints with the WTO over dumping -- the practice of flooding another country with goods at below-market prices. The WTO report also portrayed bailouts as potentially bad for trade because propping up operations of uncompetitive or insolvent firms "denies market share to more efficient producers including foreign suppliers."
A news release from the World Trade Organization that was supposed to be issued on March 25 but was prematurely published by a Dutch media outlet on March 23, addressed the issue of how economic decline follows protectionist trade measures:
“For the last 30 years trade has been an ever increasing part of economic activity, with trade growth often outpacing gains in output. Production for many products is sourced around the world so there is a multiplier effect — as demand falls sharply overall, trade will fall even further. The depleted pool of funds available for trade finance has contributed to the significant decline in trade flows, in particular in developing countries,” said Director-General Pascal Lamy.

“As a consequence, many thousands of trade related jobs are being lost. Governments must avoid making this bad situation worse by reverting to protectionist measures which in reality protect no nation and threaten the loss of more jobs. We are carefully monitoring trade policy developments. The use of protectionist measures is on the rise. The risk is increasing of such measures choking off trade as an engine of recovery. We must be vigilant because we know that restricting imports only leads your trade partner to follow suit and hit your exports. Trade can be a potent tool in lifting the world from these economic doldrums. In London G20 leaders will have a unique opportunity to unite in moving from pledges to action and refrain from any further protectionist measure which will render global recovery efforts less effective,” Mr. Lamy said.

Fortunately, some are fighting back against this incipient trend. In an online petition being circulated by the International Policy Network, the Atlas Economic Research Foundation and its Global Initiative for Free Trade, Peace and Prosperity, concerned citizens are speaking out and calling attention to the economic facts.

The petition says, in part:
... the fact that protectionism destroys wealth is not its worst consequence. Protectionism destroys peace. That is justification enough for all people of good will, all friends of civilization, to speak out loudly and forcefully against economic nationalism, an ideology of conflict, based on ignorance and carried into practice by protectionism.

Two hundred and fifty years ago, Montesquieu observed that “Peace is the natural effect of trade. Two nations who differ with each other become reciprocally dependent; for if one has an interest in buying, the other has an interest in selling; and thus their union is founded on their mutual necessities.”

Trade’s most valuable product is peace. Trade promotes peace, in part, by uniting different peoples in a common culture of commerce – a daily process of learning others’ languages, social norms, laws, expectations, wants, and talents.
The petition looks to the lessons of history:
Perhaps the most tragic example of what happens when that insight is ignored is World War II.

International trade collapsed by 70 percent between 1929 and 1932, in no small part because of America’s 1930 Smoot-Hawley tariff and the retaliatory tariffs of other nations. Economist Martin Wolf notes that “this collapse in trade was a huge spur to the search for autarky and Lebensraum, most of all for Germany and Japan.”

The most ghastly and deadly wars in human history soon followed.

By reducing war, trade saves lives.

Trade saves lives also by increasing prosperity and extending it to more and more people. The evidence that freer trade promotes prosperity is simply overwhelming. Prosperity enables ordinary men and women to lead longer and healthier lives.
There is more there to read and support, expressed more eloquently and completely than I can do. To sign the petition, go here: Do it now.

Peace and prosperity depend on the ability of free people to trade among themselves without interference.

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