The Myths Of The Recession

Myth: Here Comes Protectionism
Talk to any trade economist, and three words are bound to arise: Smoot-Hawley tariff. The now infamous act, signed into law by President Herbert Hoover in 1930, raised the average import tariff in the United States to nearly 60 percent. It was meant to address unemployment during the Great Depression, but far from fixing the economy, it plunged the world into a new era of protectionism and contributed to the global slowdown.

Comparisons between today's economic downturn and the Great Depression are rampant, so Smoot-Hawley is back on people's minds. While campaigning, President Barack Obama talked about renegotiating NAFTA and other trade deals. Countries like Russia, India and Indonesia have raised import tariffs, and French President Nicolas Sarkozy grandstands about protecting French companies against their foreign competitors. According to a new paper by two Stanford economists, a major factor in recent stock-market volatility has been the talk of a backlash against trade and globalization.

Yet all the rhetoric has led to only a few minor policy shifts. The stimulus bill's "Buy American" clause worried free-traders, but it was ultimately watered down by the Senate. And while the World Bank says that trade will contract in 2009 for the first time in 25 years, the dip is almost completely attributable to the economic slowdown, not to any new trade restrictions. Today's thick web of free-trade zones and globe-spanning institutions, such as NAFTA and the World Trade Organization, will almost certainly prevent a Smoot-Hawley II. Katinka Barysch, a political analyst at the Centre for European Reform in London, says Western countries would have to tear up the entire WTO rulebook for protectionism on the scale of the 1930s to take hold.

That seems unlikely, particularly since trade-negotiating incentives have changed since the 1930s, and indeed, even since the early 1980s, when a deep recession prompted President Ronald Reagan to impose export restrictions on Japanese automobiles. Today large companies produce their goods all around the world and regularly partner with foreign firms, making them a powerful bloc that would oppose any new restrictions. "It's a much more interwoven network of economic activity than it was in the 1980s," says Douglas Irwin, a Dartmouth economist. U.S. automakers, for instance, have equity stakes in South Korean, Japanese and European manufacturers. "Therefore it just doesn't make as much economic sense to block off imports." It's illustrative that in December, Detroit's automakers asked for bailouts, not tariff barriers; their foreign competitors already operate enormous plants in the American South, making protectionism pointless.

It's also worth noting that recessions can actually have a positive effect on trade. "Sometimes hard economic times can be an impetus to try to open up things further," says Irwin. NAFTA and the Uruguay Round, which created the WTO, were negotiated and finalized during an economic slowdown in the early 1990s. China and Taiwan joined the WTO in the wake of the Asian financial crisis.

None of this dispels the storm clouds gathering over the global economy. But it does remind us that in unpredictable economic times, today's conventional wisdom can turn out to be yesterday's news.

With Stefan Theil in Berlin

© 2009