COMPARISONS to the Depression feature in almost every discussion of the global economic crisis. In world trade, such parallels are especially chilling. Trade declined alarmingly in the early 1930s as global demand imploded, prices collapsed and governments embarked on a destructive, protectionist spiral of higher tariffs and retaliation.
Trade is contracting again, at a rate unmatched in the post-war period. The global economic machine has gone into reverse: output is declining and trade is tumbling at a faster pace. The turmoil has shaken commerce in goods of all sorts, bought and sold by rich and poor countries alike.
It is too soon to talk of a new protectionist spiral. Nevertheless, errors of policy risk making a bad thing worse — despite politicians’ promises to keep markets open. The leaders of the G20 rich and emerging economies declared that they would eschew protectionism. But this pledge has not been honoured. According to the World Bank, some members of the group have already taken numerous trade-restricting steps.
Modern protectionism is more subtle and varied than the 1930s version. In the Depression tariffs were the weapon of choice. America’s Smoot-Hawley act, passed in 1930, increased nearly 900 American import duties—which were already high by today’s standards—and provoked widespread retaliation from America’s trading partners. A few tariffs have been raised this time, but tighter licensing requirements, import bans and anti-dumping (imposing extra duties on goods supposedly dumped at below cost by exporters) have also been used. Rich countries have included discriminatory procurement provisions in their fiscal-stimulus bills and offered subsidies to ailing national industries. These days, protectionism comes in 57 varieties.
There are good reasons for thinking that the world has less to fear from protectionism than in the past. International agreements to limit tariffs, built over the post-war decades, are a safeguard against all-out tariff wars. The growth of global supply chains, which have bound national economies together tightly, have made it more difficult for governments to increase tariffs without harming producers in their own countries.
But these defences may not be strong enough. Multilateral agreements provide little insurance against domestic subsidies, fiercer use of anti-dumping or the other forms of creeping protection. Most countries are able to raise tariffs, because their applied rates are below the maximum allowed by their WTO commitments. They may choose to do so despite the possible disruption to global supply chains. And because global sourcing amplifies the effect of tariff rises, even action that is permissible under WTO rules could cause a lot of damage. The subtler variants of protection may be similarly disruptive.