A recent World Bank study indicates a disturbing rise in trade protectionism around the world in response to the economic crisis. Here are a few examples:
- Russia raised tariffs on used autos
- Ecuador raised tariffs on more than 600 items
- Argentina imposed non-automatic licensing requirements on auto parts, textiles, TVs, toys, shoes, and leather goods
- Indonesia restricted imports of garments, footwear, toys, electronics, food and beverages to only five ports and airports
- China banned Irish pork, Belgian chocolate, Italian brandy, British sauce, Dutch eggs and Spanish dairy products
- India banned Chinese toys
- The EU announced new export subsidies on butter, cheese, and milk powder
- China and India have increased the rebate on the duty drawback system for exporters
- The US, Canada, France, Germany, United Kingdom, China, Argentina, Brazil, Sweden, South Korea, Portugal and Italy have offered subsidies to domestic automobile and automotive component manufacturers
- The stimulus bill passed by the US House of Representatives would provide a 25 percent competitive margin for US iron and steel for all expenditures under the bill, though the Senate version stipulates that the provision "be applied in a manner consistent with United State obligations under international agreements" which would exempt the EU and 12 other countries that have signed trade deals with the US
The chief problem with protectionism is that it's never unilateral. When one trade partner raises barriers, the others inevitably respond in kind, undermining both the targeted industries as well as unrelated industries that suffer from the foreign retaliation. The result is a decline in international trade, which can have a devastating effect on the world economy.
In 1930, the Smoot-Hawley Tariff Act created just such a cascading effect, leading to a 66% decline in world trade between 1929 and 1934. When the tariffs were enacted in 1930, American unemployment was at 8%. In 1931, it was 16%. In 1932, it was 25%. While correlation does not prove causation, most economists blame the tariff act for counter-effectively damaging US manufacturers and significantly contributing to the Great Depression. Let's not make the same mistake again.