Protectionist Threats

Is protectionism on the rise?

Writing in the January 12 Wall Street Journal, columnist Bob Davis declared: “A wave of protectionism is swelling around the world that could further damage struggling economies.”

Davis noted that “the World Bank forecasts that global trade will shrink by 2.1% this year, the first decline since 1982.” He pointed out a variety of developing problems:

• “Under World Trade Organization rules, countries establish formal tariff levels, which are often very high, and then apply lower tariffs. That gives them leeway to boost tariffs without violating WTO rules.” Ecuador, India and Russia (not a WTO member) have recently increased tariffs.

• So-called “dumping” complaints (that is, products being sold below a certain price deemed appropriate by competitors and government bureaucrats) are on the rise.

• Other means of protectionism are in the works. “Indonesia is requiring importers to get special licenses as a way to control imports of clothing, shoes and electronics.”

Protectionism, of course, is never good for the economy. Trade shrinks as government barriers rise. Economic opportunity is lost. Lost competition and reduced consumer choice leads to higher costs.

There are two ironies here.

First, there is a great deal of talk around about the threat of another depression. The Great Depression, of course, was sparked and/or deepened by the protectionist policies of President Herbert Hoover and the Congress at the time. The massive Smoot-Hawley Tariff Act worked its way through Congress, and the market crashed. Congress passed the measure, Hoover signed it, other nations retaliated, and world trade collapsed.

Second, even though trade is crucial to U.S. economic growth, President-elect Barack Obama sent out protectionist vibes in the Senate and on the 2008 campaign trail, including voting against CAFTA and declaring his desire to rework NAFTA.

If the U.S. and other nations head down the path of protectionism, it would only make a bad economic situation far worse.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council