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PROTECTIONISM – A FAILSAFE WAY TO DEEPEN THE RECESSION

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GENEVA, Nov 10 2008 (IPS) - History teaches that in a period of financial market upheaval and pending economic downturn like the one we\’re experiencing, the resort to protectionism advocated by some can only exacerbate the situation, as it did after the great Wall Street Crash of 1929, writes Pascal Lamy, Director-General of the World Trade Organisation (WTO). In this article, the author writes that US protectionist measures after the 1929 crash touched off a domino effect of retaliation and counter-retaliation among trading partners which provoked a severe contraction of international trade, depressed growth, and drove up unemployment around the industrial world. In the US the jobless rate soared to 25 percent. The expansion of trade is a powerful instrument in overcoming economic crises. While it is essential that governments resist the siren song of protectionism, it is even more urgent that they conclude the ongoing WTO trade negotiations under the Doha Development Round, initiated in 2001. The objective of the round, shared by the 153 WTO members, is the creation of a more equitable, ambitious, relevant, and development-oriented trading system.

Shortly after the 1929 crash, in June 1930, Senator Reed Smoot and Representative W. C. Hawley produced one of the most destructive pieces of legislation in US history. The goal of this ill-conceived tariff law was to protect US farmers and industries. Duties of more than 60 percent were slapped on 3,200 imported products, lifting overall average tariffs by about 20 percent. By 1933 imports had fallen from USD 4.4 billion to USD 1.3 billion while exports fell 69 percent over that same period to USD 1.6 billion.

But there was an unintended consequence: the tariff law touched off a domino effect of retaliation and counter-retaliation among trading partners which provoked a severe contraction of international trade, depressed growth, and drove up unemployment around the industrial world. In the US the jobless rate soared to 25 percent -it is currently 6.1 percent.

More recently, during the Asian crisis in the late 1990s, the developing countries of the Pacific Rim increased their exports to rich countries by tens of billions of dollars. Those increased exports helped the Asian countries stabilise their economies and regain prosperity. Trading their way out of the crisis was as vital to the countries of the Pacific Rim as the Marshall Plan was to Europe after World War II. But the export surge did not play well in all quarters of Europe and North America and governments faced intense pressure to erect tariff barriers.

North American and European governments resisted that pressure and the result was that Pacific Rim countries were quickly back on their feet.

An important reason why protectionist measures have not followed the harsh rhetoric of some politicians is that World Trade Organisation (WTO) commitments restrict, in a transparent way, the use of trade measures.

Over 60 years, and eight rounds of international trade negotiations, the General Agreement on Tariffs and Trade (GATT) and its successor, the WTO, have established a framework of regulations governing international trade interactions. Since the conclusion of the Uruguay Round in 1994, these rules have been extended to trade in services and have expanded into areas of interest to developing countries -particularly agriculture and textiles- that had previously been addressed only marginally.

Today, as the West weathers the looming economic downturn, it can draw comfort from the fact that governments elsewhere which may be tempted to curb European or American exports will face the same constraints. Overseas markets will be of particular interest because while the United States, Europe, and Japan constitute two-thirds of global economic output, domestic demand in all of these economies figures to be flat in the coming year. In the emerging markets by contrast, the forecast is for 6 percent growth next year.

As I see it, the current financial crisis raises two potential threats to global trade. The immediate problem we face is the credit crunch. Roughly 90 percent of international trade is financed with short-term credit. Trade finance is one of the oldest forms of credit, dating to the Middle Ages, and one of the safest since it provides creditors with obvious collateral -a boatload of cargo. Yet today, trade finance is being offered at 300 basis points above the London Interbank Offer Rate (LIBOR) and even at this high price has been difficult for developing countries to obtain.

The second -and less probable- threat we face is a panic-driven slide towards protectionism. In recent years, protectionist rhetoric has certainly increased. Politicians faced with deteriorating economic conditions are fond of blaming foreigners for their woes. But the anti-trade protestations have not yet translated into protectionist action.

While it is essential that governments resist the siren song of protectionism, it is even more urgent that they conclude the ongoing WTO trade negotiations under the Doha Development Round, initiated in 2001. The objective of the round, shared by the 153 WTO members, is the creation of a more equitable, ambitious, relevant and development-oriented trading system. This would be the best contribution that the WTO could make to counteract the current world crisis. (END/COPYRIGHT IPS)

 
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