We Already Live In a Protectionist World
Some think the New Deal rescued America from economic crisis in the 1930s. Others argue the opposite. But whatever their ideology, and whatever their credentials, most of the pundits, historians and economists who debate the Great Depression agree about one thing: Whatever may have caused the crisis, protectionism, trade barriers and, yes, the Smoot-Hawley Tariff Act, helped to ensure that it lasted as long as it did. So uncontroversial is this view that it is virtually U.S. government policy. "To this day," intones a State Department Web site, "the phrase 'Smoot-Hawley' remains a watchword for the perils of protectionism."
With equal solemnity, government officials everywhere are echoing that sentiment. Last weekend, the finance ministers of the Group of Seven again swore fealty to the official anti-tariff mantra, announcing that they remain "committed to avoiding protectionist measures, which would only exacerbate the downturn." The U.S. Treasury secretary, Tim Geithner, agreed: "All countries need to sustain a commitment to open trade and investment policies which are essential to economic growth." So did his German colleague: "We will have to do everything to ensure history does not repeat itself."
Which is all very well -- except that there are many ways to pursue protectionist policies, and rest assured that every single one of them is being tried by someone, somewhere, right now. New tariffs are already in force, for example in Russia, where especially high ones have destroyed the previously thriving used-car import business (and thus inspired used-car salesmen to stage unusually violent protests). Rumors of more tariffs pending -- in Brazil, in the Philippines -- are haunting the steel industry trade press, too. Still, these are minor infractions. The real story, over the next several years, will be the spread of more carefully camouflaged protectionism: measures, some legal, some not, designed to help one nation's workers or companies at the expense of those next door.
These kinds of games are already being played stealthily in Europe, where, despite pious recitations by G-7 finance ministers -- and despite the free-trade rules that are supposed to be enforced by the European Union -- almost everyone is seeking to protect domestic industry. The French have not only thrown heavy subsidies at their automobile industry, they have made it crystal clear that the money is to be spent in France. "If we are to give financial assistance to the auto industry, we don't want to see another factory being moved to the Czech Republic," declared President Nicolas Sarkozy, failing to note that the Czechs and the French theoretically belong to the same free-trade zone, with open borders. Meanwhile, the Slovaks, who live in the same free-trade zone, have declared that if the French try anything funny with Slovakia, they're going to send Gaz de France packing.
The Germans, whose economy depends heavily on exports, often object to all of this -- but they are quietly playing a subtler game, offering special loans to German companies, for example, through German banks which the German government now partly owns. The Spanish have also joined in, with subsidies for Spanish companies, as have the Swedes. Both, like the United States, started with the automobile industry -- but if cars, why not other industries, too? Some British banks, meanwhile, have quietly told their employees not to invest abroad.
Whatever the finance ministers might say, all of these measures are, of course, extremely popular, and political parties of all stripes have capitalized on them wherever possible. The U.S. Congress put its nonsensical "Buy American . . . as long as no trade laws are broken" clause into the stimulus bill, thus guaranteeing that every infrastructure investment will be accompanied by a flood of extra paperwork. A Spanish minister has called on his nation to "Buy Spanish." In England the most popular strike slogan is "British jobs for British workers." Expect more than one political leader, on more than one continent, to rise to power in the next few years riding a wave of protectionist sentiment.
But this should surprise no one; after all, Smoot-Hawley was popular, too. At the time of its passage, more than 1,000 economists of all ideologies signed a petition against it. Since then, historians have reckoned that it reinforced the global slump: Between 1929 and 1934, world trade declined by 66 percent. Still, the politicians of the 1930s knew which way the popular winds were blowing -- and those of the present know, too. There is no need to hold any further G-7 meetings to warn against the perils of a protectionist world: We're living in one already.