Opinion: Protectionism is a trade pariah
29th Dec 08, 12:02pm
Economic historians looking for ways to avoid another Great Depression always point to the American Smoot-Hawley Tariff Act of June 1930 as a vandalism on world trade that should never be repeated. Two Republican congressmen took advantage of a popular mood in 1929 and 1930 to raise tariffs on 20,000 types of imports to the United States, hoping that protection from cheap foreign imports would protect local workers and farmers. European nations retaliated immediately and the ensuing trade war eventually tipped the United States and Europe into depression. Global trade fell 66% between 1929 and 1934. Fast forward to this year and there is again talk about protectionism and falling world trade. New Zealand's dependence on free trade means it should watch closely for any signs that the political and economic stress caused by the credit crunch doesn't cause protectionism. But we may need to look slightly off the beaten track for the protectionism that could hammer global trade hard. An outright return to the sort of crass Smoot-Hawley-style protectionism is unlikely. Despite the slightly alarming anti-free trade rhetoric from Barack Obama as he was campaigning for the Democratic nomination, his choices since his election as President have been largely in favour of free trade. His appointments of free traders Bill Richardson as Commerce Secretary and Ron Kirk as US Trade Representative were widely welcomed. The real potential for a new protectionism that slams world trade appears to come from three other areas: - international trade credit, - banking regulations and - competitive money printing. First, the World Trade Organisation warned last month of a significant reduction in global trade unless trade credit was unfrozen. Exporters in the developing world, in particular, are being refused letters of credit by shocked and cash-starved banks. These developing economies, in turn, are then unable to import the raw materials and intermediate goods needed for assembling and manufacturing their exports. Trade is grinding to a halt in many countries because of this lack of credit. Secondly, regulators in many countries are toughening up their rules on how much and what type of capital banks must hold to back their lending. This is forcing them to buy more of their own country's government bonds. This is also helping to dry up demand for the international bond issues that have helped fuel the growth of the "international" economy in trade, capital and people over the past decade. Many of these banks are also now state-owned or state-controlled. When push comes to shove, some governments will act to protect their own nation's interests through these banks rather than bolster global trade and capital flows. Thirdly, governments and central banks globally are embarking on a series of competitive money printing and currency depreciation exercises. One way to encourage exports, discourage imports and reduce the current account deficits that drive up national debts is to devalue your currency. Countries with fixed exchange rates can do it easily. There are signs China has started doing this. The other way for those with free-floating currencies is to simply print money to devalue the currency and pump up their own economies. That is what the US has started doing. The danger of simultaneous money printing exercises is that it encourages inflation, discourages saving and ultimately destabilises global trade. These three types of behaviour are not as deliberate or obvious as Smoot-Hawley. But they have the potential to be as damaging. Unfortunately, there is little New Zealand can do to combat them, apart from embarking on its own competitive money printing and government deficit-funded spending spree. However, this cure would be worse than the disease.