Trade Protectionism and Worldwide Economic Contraction

I almost went down on my knees to beg [President] Herbert Hoover to veto the asinine Hawley-Smoot Tariff. …That Act intensified nationalism all over the world.

– Thomas Lamont, banker and economic adviser, June 1930

Now is a time where we have to be very careful about any signals of protectionism.

– President Barack Obama, February 19 2009

From the purely economic point of view nothing speaks against free trade and everything against protectionism.

– Ludwig von Mises (1881-1973), Austrian economist

When the economy is booming, foreign borrowings and imports of goods and services from other countries are most welcome. They allow for more spending without inflation and they raise living standards. It is a version of having your cake and eating it too. In an economic downturn, however, the political reflex of populist politicians is to turn protectionist and to become economic isolationists by raising trade barriers. In such an environment, foreign competition becomes a convenient scapegoat for the crisis, even though the causes of such crisis are most often purely domestic in nature.

Regarding trade, the Obama administration seems to have adopted the “good cop, bad cop” routine, extolling the virtues of free trade in presidential speeches while letting Congress pass protectionist measures in series. The fear here is a repetition of the 1930s when American politicians rushed to pass the infamous Smoot-Hawley Tariff act of 1930 that triggered an international trade war and which accelerated the worldwide economic downturn. World trade plummeted into a spiral downward and domestic production for exports contracted everywhere. Normal trade links were disrupted and intricate inter-country production arrangements were dismantled.

Indeed, in a misguided attempt to fight the economic downturn, governments all over the world rushed to adopt self-destructive “beggar-thy-neighbor” policies, in a futile attempt to devalue each other’s currencies and to reduce their imports in retaliation, forgetting that one country’s imports are the other country’s exports. The consequence was that from 1929 to 1933, the value of world trade contracted by two-thirds, going from $5.3 billion to $1.8 billion.

The world economy went down with world trade and every country was worst off as a consequence. A severe recession was then turned into a worldwide economic depression. This is because trade protectionism in the modern world is the equivalent of “cutting off your nose to spite your face” and its main consequences are to spread poverty and economic dislocations.

Some seventy years later, the same mistakes risk being repeated. Most modern economies are interrelated and if politicians begin to unravel such an economic integration, the consequences may be even worst than in the 1930s, because economic integration is much more advanced and prevalent than it was then.

World trade is already contracting due to the current global financial crisis, a decline in commercial bank trade credits and a drop in private investments. According to the World Bank’s projections, total world trade in goods and services this year is expected to fall 6.1 percent. The decline will particularly hurt large export-led economies such as Mexico, Germany and Japan.

The issue of protectionism is also particularly important for Canada, the U.S.’s most important trade partner. The United States and Canada not only share this continent, but they also have a mutually beneficial trading relationship that has been enhanced with the signing of the Canada-U.S. Free Trade Agreement on October 12, 1987. This treaty was enlarged in 1994 to include Mexico with the implementation of the North American Free Trade Agreement (NAFTA). As a consequence, there are no tariffs on most goods that pass between Canada and the United States.

In 2008, Canada’s trade with the United States accounted for about 76 percent of its total international exports and 63 percent of its imports, while U.S. exports to Canada represented about 20 percent of total American exports. A lot of American jobs are tied to American exports to Canada. In fact, Canada is the leading export market for 36 of the 50 U.S. States and Canada is a larger market for U.S. goods than all 27 countries of the European Community combined.

Moreover, Canada is the single largest exporter of total petroleum to the United States, supplying the U.S. with more than 2.5 million barrels per day. What is more, this oil supply is guaranteed under Nafta. There is also an important and growing cross-border trade of electricity between Canada and the United States that links the two economies.

This does not mean, however, that trade frictions between Canada and the United States do not exist. Sometimes politicians behave as if the trade agreement between the two countries did not exist. A case in point is the routine inclusion of “buy American” provisions in spending bills voted by the U.S. Congress, which can be considered overt protectionist trade-distorting measures and contrary to the spirit and the letter of the free trade agreement.

If the lessons of the past have been learned, governments should resist the temptation to export their economic problems abroad and should work instead to stimulate their economies without resorting to protectionist measures. What is needed now is to avoid sending the world economy into a self-reinforcing contraction that would hurt everyone.

Rodrigue Tremblay is professor emeritus of economics at the University of Montreal and author of the book The New American Empire. He can be reached at: rodrigue.tremblay@yahoo.com. Read other articles by Rodrigue, or visit Rodrigue's website.

5 comments on this article so far ...

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  1. Michael Kenny said on May 29th, 2009 at 11:29am #

    The Empire strikes back! A classic expression of the neo-liberal ideology that got the world into the mess it’s in in the first place! It’s like arguing that the best way to stop people driving cars after they’ve had a drink is to encourage them to have two drinks before they drive!

  2. Deadbeat said on May 29th, 2009 at 8:22pm #

    I can’t say that I agree with the author that Smoot-Hawley was the primary cause of the Great Depression — especially in the U.S. In fact I think the U.S. could survive protectionism because it has such a very large population and have enough resource to build a vibrant economy without the need of large imports.

    The reason why the U.S. won’t go “protectionist” has to do with maintaining the system of world-wide Capitalism and especially keeping U.S. Labor off-balance. If jobs could not be shipped oversea then labor would have increased bargaining power. I don’t think you’ll see the Congress go hog-wild over protectionism either.

    The reason for the Great Depression has more to do with inequality. There were tremendous speculation and inequalities in the 1920′s which set the stage for a Capitalist crisis of the 1930′s. The same is true today. Thirty years of stagnant wages and inequality has set the stage for a crisis in Capitalism.

    Workers are not in control of the economy. Clearly if the workers were in charged there would be no “Depression”. People would have access to the resources they need.

  3. JE said on May 29th, 2009 at 9:04pm #

    Am I on the right website? This is DISSIDENT voice?

    There are plenty of neoliberal apologists willing quote ideologues like Von Mises and Friedman in the corporate media…no need to give them a voice here. And as was state previous the logic of this and nearly all economists (widely known in academics cricles to be the flimsy non-science “social science” in the bunch) is skewed towards the status quo and untenable presuppositions supporting capitalism.

    Pathetic. I never thought I’d see the day an article of this low caliber would be posted on DV.

  4. john andrews said on May 30th, 2009 at 12:40am #

    I have to disagree with JE – not about the quality of the article, but that it should appear on DV. People do not become well informed by only listening to one side of an argument.

    I have strong doubts about the ‘evils’ of protectionism, and my doubts are reinforced, not lessened, by the fact that our illustrious leaders are opposed to it. Surely if those who ruined the world’s economy are opposed to something, that something must be good?

    Rodrigue,

    You write: ‘What is needed now is to avoid sending the world economy into a self-reinforcing contraction…’ but apart from siding with those who screwed the world in the first place do not suggest how.

    One of the most obvious effects of our ruined economy is exploding unemployment. People, and the economy, need jobs that pay a living wage; but thanks to our non-protectionist governments and our thrusting captains of industry who between them have all but destroyed local manufacturing in their tireless quest for finding the cheapest slaves on the global slave market, that is now all but impossible. Suggesting that we should continue to follow these people is not clever.

    Protecting local businesses may have its faults, but it is far more likely to stimulate the labour market, and hence the national economy, than protecting the global slave trade.

  5. Max Shields said on May 30th, 2009 at 6:35am #

    Protectionism is a way to frame the need to cultivate a local indigenous economy. It has a variety of proponents who may be disagreeable about other topics, or even biased from a chauvinist perspective.

    But the notion of an inherent evil in cultivating and sustaining a local economy is wrong-headed if you care about the planet, life and ridding the world of poverty and hunger.

    From a trade perspective, read Bad Samaritans (The Myth of Free Trade and the Secret History of Capitalism) by Ha-Joon Chang.

    So while the term “protectionism” may have been adapted by political deviants on the nationalistic side, stripped of this prejudice is a very important, even vital, need for self-sufficiency.

    Free Trade is the manifestation and extention of industrialized modernism. It has deforested large swaths of land and created poisonous carbon from poor mechanized farming and all that that implies. People can feed themselves and provide for themselves with little to no help. It is Free Trade which has upended the indigenous capacity to live off the bounty that nature provides in food, medicene and fuel.