All governments regulate foreign trade. The extent to which they do so is a matter of great controversy and debate.
Advocates of protectionism focus on the cost advantages of cheap labor in less developed countries, infant domestic industries needing protection to give them time to grow, national security and lowered environmental standards abroad. Governments use a variety of tools to protect their country's economy including: tariffs on imports, import quotas, agreements to voluntarily limit exports, subsidies, trade bans and impositions of stringent health, environmental and safety standards.
Over the last decade, complaints of trade protectionism have been few and far between, especially with so many other issues to fret over — war, terrorism, earthquakes, collapse of the housing market, unemployment, auto recalls and more recently, sovereign default risk. However, despite the gradual pick-up in the global economy, protectionism has been building up quietly and steadily all over the world. The news is full of reports of protectionism:
- Last Wednesday, Europe's largest defense contractor, EADS, announced that it was pulling out of a multibillion dollar race to supply the U.S. Air Force with air refueling tankers, a deal worth $50 billion. Ministers in the UK, France, Germany, as well as the European Commission, suggest that Boeing is getting preferential treatment (aka protectionism) and are hinting at possible repercussions.
- Last Thursday, U.S. Treasury Secretary Tim Geithner delivered a warning to the European Commission that the EC's plans to regulate the hedge fund and private equity industries shows definite signs of protectionism against U.S. groups.
- Last Friday, President Obama announced a government effort to promote U.S. goods overseas, hoping to boost competitiveness abroad and create jobs in the U.S. Ralph C. Bryant, senior fellow at the Brookings Institution, said efforts to stimulate exports could prompt other countries to take similarly ambitious actions. "There's no way that all countries can increase exports at the same time," Mr. Bryant said. "If we do it and everyone else does it, it will be less successful and raise the possibility of friction (aka retaliatory protectionism)."
We learned back in Econ 101 that no country wins in the "beggar-thy-neighbor" game of protectionism. It certainly wasn't a good idea in 1930 when our government passed the Smoot-Hawley Tariff Act, which put tariffs on over 20,000 imported products. Designed to increase American jobs, it had the opposite effect as exports and imports with the rest of the world plunged by more than 50 percent.
Unfortunately, in periods of economic distress, governments tend to take defensive measures to protect their domestic economies. One of my favorite market analysts, Robert Prechter of Elliott Wave International, believes the "social mood" that spawned the Smoot-Hawley Act was actually the catalyst for the 1929 stock market crash. In his best-selling book Conquer the Crash he said:
"One example of action impelled by defensive psychology is governments' recurring drive toward protectionism during deflationary periods. Protectionism is correctly recognized among economists of all stripes as destructive, yet there is always a call for it when people's mental state changes to a defensive psychology. Voting blocs, whether corporate, union or regional, demand import tariffs and bans, and politicians provide them in order to get re-elected. If one country does not adopt protectionism, its trading partners will. Either way, the inevitable dampening effect on trade is inescapable. You will be reading about tariff wars in the newspapers before this cycle is over."
The G-20 group of nations had three summit meetings since the financial crises began: in November 2008, April 2009 and September 2009. Each time, the leaders reaffirmed their commitment to fight protectionism. A comprehensive study released in December 2009 by the independent trade monitoring group Global Trade Alert reports that since the first G-20 meeting, there have been 297 "beggar-thy-neighbor" protectionist policy measures. Add another 56 implemented measures that they say are likely to have harmed some foreign commercial interests and the total reaches 353, almost one act of protectionism by a G-20 country every day of the year!
Not surprisingly, China is the major target of protectionist measures, followed by the U.S. and Germany. Russia is one of the worst offenders, as it imposed protectionist measures on some 40 percent of its product lines.
There has been little progress on multilateral trade talks. In the World Trade Organization (WTO), few now expect governments to complete the Doha Round of trade negotiations any time soon. A successful Doha Round would limit the ability for governments to increase tariffs or agricultural subsidies in the future, send a strong signal of the international community's commitment to keep trade and investment flowing, and help countries resist pressures for protection when they begin to unwind their current expansionary policies. Unfortunately, each of the WTO trade meetings over the last eight years has resulted in standstill and failure. The Doha Round might actually collapse multilateral trade talks once and for all in 2010, just possibly taking the WTO down in the process!
In an attempt to end this somewhat depressing piece on a light note, here's a case of protectionism you may not have heard about. Last September, the U.S. Department of Transportation reneged on a longstanding agreement to allow Air Canada charter flights to fly Canadian NHL hockey teams between cities in the U.S. when they have a sequence of games here. Normally, under our "open-skies" agreement, Canadian airline flights can only visit one U.S. city before returning. An exemption had been in place for eight years that allowed certain sports and celebrity charters to make several stops in U.S. cities. The sudden decision by the Obama administration, apparently in response to pressure from the Airline Pilots Union, had six Canadian NHL teams scrambling to find airline alternatives south of the border. After what they did to our hockey team in the Olympics, should we really care?
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