An unfortunate fallout of the global economic crisis is a creeping rise in protectionism. Many of the economic stimulus packages contain provisions that encourage spending on local products in preference to imports. When times are bad, economic nationalism – protectionism in another garb -- has a tendency to raise its head. It happened in the 1930s. It might happen again, unless something is done to prevent such tendencies.
Besides giving birth to Keynesian economics -- which propagates expansion of public spending to compensate for deficient aggregate demand in economic slowdown -- the Depression of 1930s taught us more than a few lessons in economic policy. One was that raising trade barriers in times of global recession can only make matters worse. The Smoot-Hawley Tariff Act passed by US Congress in 1930 proved to be the last nail in the coffin of the pre-war global economy. It spurred beggar-thy-neighbor tariff increases – trade war – across countries, shrinking trade, and prolonging the Depression. The General Agreement for Tariffs and Trade (GATT) signed in 1947, a precursor to World Trade Organisation (WTO), was meant to prevent a repeat of such self-defeating policies. It worked, for the better part of sixty years following the World War II. With world output shrinking for the first time since 1982, WTO projects trade volume to decline by 9.0% in 2009. While the transmission mechanism for this fallout has been from diminished demand to shrinking trade, basic principles of international economics indicate that this is just the wrong time to raise trade barriers in order to shore up domestic industries in distress. That will only make things worse, prolong the current recession, and keep the global recovery at bay.
Yet, that seems to be the disturbing trend as there is growing evidence of countries, both developed and developing, adopting trade measures that smack of protectionism either directly, or in some ‘murky’ form. Despite the statements by Group of Twenty (G20) leaders at the Washington summit last November that they will hold off any protectionist measures at least until end of 2010, that pledge was upheld more in its breach, as the World Bank collated evidence that 17 of the G20 countries had initiated some form of protectionist measures (Table 2). As if that is any consolation, there is some difference in the approach adopted by developed and developing countries. Developed countries have opted for subsidies and support packages (e.g. to carmakers and farmers), while developing and emerging market economies resorted to protection of all mixes and forms: subsidies, tariffs, quantitative restrictions (QRs), special restrictions like non-automatic licensing requirements, more stringent application of WTO-compliant standards or sanitary and phytosanitary (SPS) requirements, etc.
