Ask most people what led to the Great Depression, and they are likely to point to the 1929 stock market crash as the cause. Put that same question to historians and economists, and their response will be far different. They will explain that the higher U.S. tariffs imposed by the Smoot-Hawley Tariff Act were the real culprit.
Despite an almost unanimous plea by the American economist community not to do it, President Herbert Hoover signed Smoot-Hawley into law in 1930 as the global economy weakened following the 1929 crash. The higher tariffs, essentially extra taxes imposed on imported goods and services, were intended to protect U.S. jobs and goods against foreign competition. Instead, they provoked economic retaliation by our global trading partners, which in turn precipitated a decade-long economic slump worldwide that did not really end until the onset of World War II.
The Development Research Group at the World Bank recently studied national trade policies since the outset of the global financial crisis in 2008. In the World Bank's April 2010 report, the researchers concluded that the fear countries would significantly raise tariffs, in Smoot-Hawley fashion, has not materialized. Although good news, it does not mean that economic nationalism is dead, however.
In part due to the creation of the World Trade Organization—and perhaps in acknowledgement of the lessons of economic history—national governments have refrained from using tariffs to protect local industry. But we should not jump to the conclusion that since tariffs have not been increased since 2008, protectionism is no longer a significant risk.
In today's war on protectionism, the battle must focus not only on whether governments are imposing restrictions on the flow of goods and services, but also on whether they are stanching the flow of direct investment from other nations. Foreign direct investment, or FDI, refers to any investment made in a particular country by a company or government, usually through a sovereign wealth fund, of another nation. Foreign direct investments can take many forms, but typically they are expenditures to build new factories or other infrastructure or to acquire companies directly.
The advantages of FDI are significant for both the investor and the country in which the inbound investments are made. Cross-border acquisitions and other forms of FDI permit the efficient flow of capital, technology, and labor. Cross-border deals offer enhanced shareholder value to investors and greater choice to consumers. Other than fears about the loss of control to a foreign acquirer, few observers dispute the benefits from foreign direct investment. Nevertheless, protectionist legislation and regulation aimed at slowing, discouraging, and potentially even stopping cross-border acquisitions has been on the rise in recent years.
An interesting case study is the negative reaction of certain European Union governments to proposed takeovers of companies in their country by a company headquartered in another EU country. Despite the agreed goal of creating an integrated economy within the EU, the reaction to cross-border acquisitions has been anything but pan-European in a number of fairly high-profile situations.
National governments within the EU have sought to protect companies domiciled in their countries from acquisitions by companies in other EU countries, with host-country governments attempting to block the bid by German utility company E.on for Spain's Endesa in 2006; Spanish bank BBVA's offer for Italian bank Banca Nazionale al Lavoro in 2005; and the attempt by Germany's MAN to purchase Scania of Sweden is 2006.
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