Will Subprime Crisis Lead to Protectionism?

♠ Posted by Emmanuel in , at 9/25/2008 11:38:00 AM
With commentators often calling the current subprime crisis "the worst economic downturn since the Great Depression," it is hardly surprising that many are warning of a potential outbreak of global trade protectionism akin to the aftermath of the cataclysmic events of 1929. Only yesterday, WTO Director-General Pascal Lamy discussed this very topic, naturally bringing up Messrs. Smoot and Hawley as progenitors of protectionist trade armageddon which led to similar barriers being put up by other countries.

Note, however, that some still dispute the negative effects attributable to the Smoot-Hawley Act. Nonetheless, its passage did usher in a period when sentiment towards trade became more negative around the world. Can the same happen again? Lamy thinks so and warns against it. Here, Lamy addressing an NGO forum perhaps demonstrates a greater WTO willingness to address civil society concerns. I suggest that you read Lamy's short speech where he (of course) suggests that soon-to-restart negotiations should see to it that a Doha deal is in the offing. Here is the introduction:
This year the WTO opens its doors to the public against a background of newspaper headlines heralding a potential Great Depression “Two.” But policy-makers in the United States, who have seen several giant financial institutions sound their alarm bells last week, as well as policy-makers across the globe, are desperately seeking to avoid the series of mis-steps that accentuated the financial crisis of the 1930s.

They are all stressing that lessons from the Great Depression have been learned, and that the many policy mistakes that were associated with it will be avoided. But one of the important lessons of the Great Depression, which we must not forget, is that “protectionism” and economic isolationism do not work. They are policies of the past, which should have no place in our future.

As tempting as it is in moments of crises to give our producers comfort that we are shielding them from competition by shutting our borders to imported goods or services, this course of action must not be pursued. In fact, the infamous Smoot-Hawley Tariff Act of the 1930s that raised US tariffs on over 20,000 imported goods to record levels led to nothing but a trade war between nations. In so doing, it ended up impoverishing us all; proving that protectionism, and beggar-thy-neighbour policies, are a dead-end.

In a financial crisis, and at times of economic distress — in particular at a time of soaring world food prices, what impoverished consumers desperately need is to see their purchasing power enhanced and not reduced. What is needed in times of crises is to enable consumers to purchase more for less. The temptation to shut our borders does exactly the opposite. There is no doubt therefore that the current hurricane that has hit financial markets must not dissuade the international community from pursuing greater economic integration and openness. But in order to be both sustainable and fair, this integration has to be based on rules. And the rule-book needs to be updated regularly.