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How free trade regimes collapse

Under circumstances of international economic duress, free trade is especially jeopardized:  democratically elected officials, even those committed in principle to unfettered commerce as the best-available engine of economic growth, will cede to local demands for protection.  Desperate to preserve market share, governments will be tempted to raise tariffs that make imports more expensive and locally produced goods cheaper, or they will be persuaded that economic exigency warrants temporary protections that will likely only induce retaliation elsewhere.  Thus are set in motion cycles of retaliatory protectionism like the one perpetuated by the notorious Smoot-Hawley tariffs (the Tariff Act of 1930) now believed to have worsened the deep economic depression of the late 1920’s and 1930’s.

When Herbert Hoover signed the Smoot-Hawley Act in June 1930, Thomas Lamont, a J.P. Morgan partner and Hoover adviser, begged him not to (along with a thousand economists who also petitioned against the bill):  “I almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot Tariff.”  The legislation jumped duties on almost 900 American imports.  Decades later, debating the merits of NAFTA with Ross Perot on the Larry King CNN show, then-Vice President Gore presented Perot with a framed picture of the two Congressmen.

While free trade regimes are regularly defended by economists – the intellectual commitment remains strong despite work done over the last several decades showing that nascent markets require or at least have inevitably benefited from protective regulatory regimes and that regimes today most adamant in their declared support for free trade (like the United States and Japan) provided intensive protection for their long-dominant manufacturing sectors – the arguments for and against protectionism are alive again thanks to the severity of the current economic downturn.

The uncertain signals sent during the campaign by Barack Obama (he said we couldn’t hide from the world economy but also that NAFTA should be renegotiated) have been reinforced by his early Cabinet picks.  As Clive Cook put it last week, “Mr. Obama’s US trade representative (his chief international negotiator) will be Ron Kirk, a former mayor of Dallas, a leading proponent of NAFTA and a long-time supporter of liberal trade.  His appointment disappoints the president’s supporters on the left of the party.  The new labour secretary has them applauding, however:  she is Hilda Solis, an ally of the unions, a leader in Congress of opposition to the Central American Free Trade Agreement and a forthright critic of orthodox liberal trade.”  Larry Summers, director-designate of the National Economic Council, is a big-time free trader; Bill Richardson, picked to be the next Commerce Secretary, kept calling for “fair” trade on the campaign trail.

The debate over the consequences of free trade, especially when broadened beyond the technical mathematical models and into the domain of distributive politics, gets complicated fast.  Even the strongest advocates of free trade agree that codifying it sets in motion significant sectoral dislocations that imperil communities and work at odds with local social justice imperatives.  President Clinton tried to square this circle by arguing that trade needed to be promoted, but that such promotion also needed to include strengthened social security networks to help those dislocated by the vagaries of global capital, a position that has become today’s trade realpolitick on both sides of the political aisle.  This position has enabled the ongoing negotiation of global trade instruments, both on a regional and national basis (such as the agreement now being advocated by President Bush negotiated with Colombia) and within the ongoing framework of what started as the Global Agreement on Tariffs and Trade (GATT) and has since evolved into the World Trade Organization legal regime.

The common expectation is that the global trade talks most recently stalled in the so-called Doha Round will be even more imperiled by the bad economy.  Clive Crook:  “With unemployment rising, wages under pressure and no firm countervailing push from the administration, protecting jobs (or claiming to, at any rate) is likely to be a higher priority than liberal trade.  The prospects for widening the opportunities for international commerce look grim.”  The Doha failure was disconcerting even to some economic progressives since global poverty was explicitly on the agenda – “while idealistic in its goal, [Doha] set out in 2001 to develop a new platform for global cooperation that would depart from traditional aid and development programs” (MacBain, 39-40).  The World Bank had estimated that a Doha agreement might have brought as many as 32 million persons out of extreme poverty.

Just this month, the World Bank projected that the total volume of global trade is likely to fall in 2009 by 2%, the first actual drop since 1982 (the estimate might be conservative given December reports, based on year-to-date data through November, showing roughly twenty percent drops in exports from Taiwan, Chile, and South Korea).  Several countries, including Russia and India, have already announced tariff increases, although jumps so far haven’t posed a major threat because they only undo tariff cuts previously announced that went lower than international law had required (and so the new increases don’t violate WTO protocols).  But even this path to higher tariffs poses dangers:  “If all countries were to raise tariffs to the maximum allowed, the average global rate of duty would be doubled, according to Antoine Bouet and David Laborde of the International Food Policy Research Institute in Washington, DC.  The effect could shrink global trade by 7.7%” (Economist, “Barriers”).  As the magazine editorialized, even “a modest shift away from openness – well within the WTO’s rules – would be enough to turn the recession of 2009 much nastier.”

In such an environment two prospects seem especially likely (in addition to the third:  mounting outright protectionism and the risk of reprisals).  One is that global economic giants like the European Union, China and the United States will continue to sidestep global framework talks by cutting one-on-one-deals with specific trading partners.  The problem with that approach is that side deals can complicate wider talks; local arrangements thus undermine international ones.  And one-on-one negotiations are more easily dominated by this-or-that industrial lobby, where final arrangements end up sideskirting fundamental distortions in trading for the benefit of entrenched corporate interests on both sides.

The other prospect may be the most insidious, and has already been set in motion thanks to bipartisan support.  This approach provides protection not by taxing imports but by subsidizing exports.  The latest automobile bailout is a classic example of this sort of non-tariff trade barrier; American cars have been given a massive $18 billion economic benefit relative to the car companies manufacturing in other nations.  For now the huge investments being made in national banking and manufacturing and infrastructural development have not triggered serious retaliation since everyone is doing it and all are agreed that bailouts are needed to avert far greater economic catastrophe (at least this is the rhetorical bludgeon that has been used so far to enact gargantuan packages).

These subsidies are not new – in the United States, the 2008 Farm Bill promised another $20 billion in help for cash-crop producers.  But individual ad hoc bailouts acquire an accelerating logic, and turn into subsidy cycles that are hard to resist – China is now talking about domestic steel subsidies and has already put in place more than 3,000 tariff rebates established to promote Chinese products.  Indonesia has raised tariffs on 500 products this month; France has started a national fund to protect French companies from being bought out by foreigners; and Russia has imposed a tax on imported pork and cars (Faiola and Kessler).  And “there are other, more subtle, means of protection available.  Marc Busch, a professor of trade policy at Georgetown University in Washington DC, worries that health and safety standards and technical barriers to trade, such as licensing and certification requirements, will be used aggressively to shield domestic industries as the global downturn drags on” (Economist, “Barriers”).

Over time these localized subsidies unravel both the legal architecture of global trade and the political good will necessary to sustain it.  Part of the reason the Doha Round failed was an inability to come to terms on long standing trade subsidies, such as American and EU cash support for their agricultural sectors and other smaller but flash-making provocations.  When America refuses to import Chinese toys we say it’s on account of safety but they see it as a trade barrier.  When France throws up obstacles to importing American wine they say they are simply protecting their national culture, but we cry foul.  South Africa insists that Italian mining companies doing business outside Pretoria adhere to affirmative action mandates, which Italy says is an impediment to international commerce.  Europe threatens to prohibit the import of American cars because they pollute too much, and we cry protectionism.  And so on.  Patterns of reasonable protection are thus made acrimonious, and nations unable to throw cash at their favored industries consider reverting to more traditional forms of tariff protection.  And this is how trade wars are ignited.

It has to be conceded that the political/rhetorical threat of trade war! is too easily bandied about, and liberals have long rightly complained that economic justice policies are inevitably thrown under the bus when such Great Depression talk looms.  As I read a recent column by Jeff Immelt, CEO of General Electric, laying out a case for why “business and government leaders must reset the debate, re-establishing why interdependent economies and healthy competition are good for the world,” and then proposing six “GE” principles to take charge of such a debate that try to have it both ways (protectionism must be resisted and global trade must be fair), I admit to skepticism.  And even a recent essay in the free-trade-leaning Economist admitted recently that “few economists think the Smoot-Hawley tariff was one of the principal causes of the Depression.”

But the history of the Smoot-Hawley protections is cautionary nonetheless.  The bill was not supposed to be so draconian, but started as a much more modest effort to provide some quick help to American agriculture.  “With no obvious logic – most American farmers faced little competition from imports – attention shifted to securing for agriculture the same sort of protection as for manufacturing, where tariffs were on average twice as high” (Economist, “Battle”).  In a nearly six-month conference reconciliation process, the bill was quickly larded up – Robert LaFollette, the Wisconsin progressive, said the bill was “the product of a series of deals, conceived in secret, but executed in public with a brazen effrontery that is without parallel in the annals of the Senate.”

While the actual economic costs associated with the bill’s 890 tariff hikes were modest, the deal soured international comity – the League of Nations (which of course the United States had never joined) was negotiating a “tariff truce” which fell through in the resulting acrimony.  Even in a climate like today’s, where product manufacturing is deeply interdependent and reliant on multinational industrial networks, political disputes can easily escalate.  British prime minister Gordon Brown has already given major speeches implicitly connecting the car bailout to protectionism, the German automaker Opel has used the bailout to argue for 1-billion euros in credit guarantees, and the EU recently agreed to a $50 billion package of support that will help European automakers meet newly toughened environmental standards.  And regimes of free trade, deeply imperfect as they are, may thus give way to even more destabilizing nationalistic free-for-alls.

SOURCES:  Clive Crook, “Obama has to lead the way on trade,” Financial Times, 22 December 2008, p. 9; Jeff Immelt, “Time to re-embrace globalisation,” Economist/World in 2009, p. 141; “The battle of Smoot-Hawley,” The Economist, 20 December 2008, pgs. 125-126; “Barriers to entry,” The Economist, 20 December 2008, pg. 121; “Farewell, free trade,” The Economist, 20 December 2008, pg. 15; Louise Blouin MacBain, “Doha’s good deeds,” World Policy Journal (Summer 2008): 39-43; Anthony Faiola and Glenn Kessler, “Trade barriers toughen with global slump,” Washington Post, 22 December 2008, p. A01; Jemy Gatdula, “Trade tripper: Cars, plans, and bailouts,” Business World, 28 November 2008, pg. S1/5.


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