In previous posts, we’ve discussed the governmental errors that turned an economic lurch into the Great Depression. The Smoot-Hawley Tariff tanked the U.S. economy and prompted widespread retaliation against the U.S. The result: economic meltdown.
In every economic crisis, politicians and policy makers always seem to go to the mattresses. And one of the first tricks out the bag is protectionism, whether tariff or non-tariff – and non-tariff means subsidies as well as anti-dumping cases, much of which occurs under the WTO radar.
While watching our own government in full-scale mattress-mode, it’s nice to hear a voice of sweet reason – from Russia. Here’s Konstantin Sonin of Moscow’s New Economic School with a piece entitled ‘Protectionism is the Worst Protection’ in today’s Moscow Times:
One of the causes of the Great Depression and, indirectly, the catastrophe of World War II was the growth in the early 1930s of protectionism — that is, helping domestic producers gain unrivaled access to consumers by raising tariffs on imports. It is not surprising, then, that economists are worried that today’s leaders might pour gasoline on the fire by hiking import tariffs and subsidizing exports in an effort to give their citizens short-term relief from the negative effects of the financial crisis.
For Sonin, many countries can act without recourse to the WTO, which doesn’t help.
Even though increased protectionism is likely to prolong the crisis and lead to higher prices for consumer goods, WTO member states might significantly step up protectionist measures in the near future. The problem is that many of the moves to lower trade tariffs and subsidies for domestic industries in recent years have taken place outside the framework of the WTO. But there is a flip side to that. Many countries can now raise tariffs on industrial and agricultural goods without violating their trade obligations. If one group of countries raises tariffs and weakens its currencies, other countries can respond by dumping their goods, enacting special taxes and adjusting their subsidies for domestic manufacturers — and all within the legal framework of the WTO. That is partly what happened during the last global financial crisis in 1997 and 1998.
But what’s the remedy in the current crisis? Sonin, discussing a report from the VoxEU.org Project, makes the case for more or less classical treatment: domestic monetary policy from Keynes with international economics from Smith:
The recommendations by the economists in the new book are fairly straightforward. First, governments should adopt domestic economic policies like those advocated by 20th-century British economist John Maynard Keynes and foreign economic policies more attuned to the ideas of 18th-century British economist Adam Smith. This means fighting the recession with monetary — and not protectionist — measures. Second, WTO members should finally complete the stalled Doha Round negotiations to reduce global trade barriers. Third — and this is fully feasible — they should create a mechanism for monitoring protectionism among the world’s leading economies.
Although I have reservations about Keynes, hearing Smith’s name ‘mentioned in dispatches’ by Euro economists is sweet music indeed – even sweeter coming from a Russian.
And note that phrase, ‘pouring gasoline on a fire’.
