The return of protectionism

China is America's primary target

By Associate Editor David Stevenson Jan 16, 2009




Many analogies have been drawn between today's economic decline and the Great Depression. Now it seems protectionism is making a comeback too, reports David Stevenson.


What is protectionism?


Potentially one of the global recession's next big issues. Protectionism is the policy of restraining trade between countries through government regulation. Not only are tariffs and/or quotas levied on imported goods, but restrictions are also imposed on foreign takeovers of local markets and companies. Protectionism goes hand-in-hand with anti-globalisation, which opposes the power of large, unregulated multinationals; and economic nationalism, which champions only domestic-owned production and consumption. All oppose international free trade, where government barriers and taxes are minimised. It's appealing to politicians in hard times as it promises to save jobs and wages from global competition, but historically the effects have been disastrous for the economy.


Protectionism: where did it start?


Modern protectionism was born in America in the 19th century when both Democrat and Republican parties advocated the anti-trade "American System" to "protect" US industry. In the 1930s, the US Smoot-Hawley Tariff Act raised taxes on more than 20,000 imported goods to record levels. When other countries retaliated by raising tariffs on US products, American exports and imports, as well as overall world trade, plunged by two-thirds, exacerbating and prolonging the Great Depression. But since the end of World War II, the US government has been one of the most consistent advocates of free trade, helping to set up the General Agreement on Tariffs and Trade (GATT) and later the World Trade Organisation (WTO), as well as the 1990s North American Free Trade Agreement (NAFTA).


But now it's all change again?


"The weak world economy is giving rise to numerous downside risks," says Moody's Asia, including "escalating protectionism and greater social unrest as the global slowdown consumes millions of jobs." Industries worldwide are asking their governments for protection from imports, and also taking legal action against overseas rivals who "dump" products abroad (sell at below-market prices). A total of 85 new anti-dumping cases were launched by 16 countries in the first half of 2008, compared with 61 the year before, says the WTO. Almost 50% targeted China. Those numbers are likely to rise sharply in the second half as economic woes worsened.



So the old tension is rebuilding?


Yes – with America among the main countries winding it up. "US Democrats and their allies in steel, textiles and organised labour are pushing to include strong 'Buy America' provisions" in the government stimulus proposals "that would limit spending to firms in the US", says The Wall Street Journal's Bob Davis. It all means that America "may slip from the free trade church", says The Daily Telegraph's Ambrose Evans-Pritchard. "Last month's $17bn bail-out of General Motors and Chrysler was a step across the Rubicon towards a protectionist industrial policy, even if that wasn't the motive."


How are other countries responding?


"This could set off a huge response in other countries," says Hans Redeker at BNP Paribas. "There's already talk of a €100bn (£91bn) fund in Germany to save its industry from being sold off cheap." French president Nicolas Sarkozy has proposed a "strategic investment fund" to fend off foreign "predators" hoping to snap up France's crown jewels. Emerging market nationalist measures are getting tougher, too. Indonesia is resorting to special "licences" to choke off imports, India and Vietnam have levied duties on steel, while Russia has imposed tariffs of 30% on cars and 15% on farm machinery.


Isn't protectionism breaking the rules?


Seems not. Global trade deals may have greatly reduced tariffs, but they do little to prevent protectionism. "The tariff binding is a maximum," says Reuters' John Kemp. "Applied rates are often below it, in some cases substantially. The differential between applied rates and bound rates is a measure of how far countries could raise their tariffs without violating WTO commitments". Also, only a dozen countries, plus the EU, have signed up to a WTO code aimed at ensuring that government spending is open to foreign firms. Even those signing the accord are allowed exceptions, such as the US for Pentagon, state and local government purchases. Much of Obama's stimulus plan under those "Buy America" provisions wouldn't violate any WTO obligations. "It's surprising how much room there is within the WTO framework to increase protection without overtly violating agreements," says Professor Gary Hufbauer at the Institute of International Economics.


Protectionism: what is America's primary target?


Beijing. "China must change its currency practices," said Obama during 2008's election campaign. "Because it pegs its currency at an artificially low rate, China is running massive current-account surpluses. This is not good for US firms and workers, and not good for the world." As the Chinese have since continued trying to stop the yuan from rising, "in the mind of Congress, almost anything that targets China is now considered fair game", says Professor Hufbauer. "But the Americans won't be the only protectionists. I'm hopeful this move to protectionism will be slower to take hold than in the 1930s, but it's a race against time. If the sun doesn't start to come up on the economy and we're still grinding along in mid-2010, this could be very serious." And as we saw almost 80 years ago, that could make a bad situation far, far worse.

Expertos mexicanos temen una ola de proteccionismo en EE.UU. con Obama


14/1/2009 - 19:11(GMT)



Julián Rodríguez México, 14 ene (EFE)- La intención de Barack Obama de revisar el Tratado de Libre Comercio de América del Norte (TLCAN), anunciada en su reciente encuentro con el presidente mexicano, Felipe Calderón, ha despertado en México los temores de que surja una ola de proteccionismo en EE.UU. que perjudique al país.

El mandatario electo estadounidense, Barack Obama, "señaló en un lenguaje ambiguo que se debe trabajar en el perfeccionamiento del TLCAN de los acuerdos paralelos en materia laboral y ambiental", consideró el diplomático Jorge Montaño