One of the most insidious consequences of the worldwide recession, particularly if it persists for an extended period, will be the growing tendency toward “economic nationalism”, or, to put it more bluntly, the protection of markets, industries, and jobs by home countries who feel threatened by free trade in a shrinking economy. It’s a natural emotion, and one fanned by populist demagogues to their political benefit and often the detriment of their people. Of course, the worst example of this phenomenon was during the Great Depression, where the “beggar thy neighbor” trade policies spawned by the disastrous Smoot-Hawley Tariff Bill in the U. S. is generally considered to have greatly deepened and prolonged the worldwide slump.
In A Splendid Exchange: How Trade Shaped the World, a great book that I reviewed last year, author William J. Bernstein takes a slightly different view of the impact of Smoot-Hawley, but one that is instructive in any case. He says that, contrary to common belief, the bill did not significantly decrease overall trade flows, it probably resulted in only a 1-2% decrease in world gross domestic product, protectionism was already a big problem even before its adoption, and that it merely represented the peak of world protectionist attitudes. Notwithstanding that somewhat different take, he acknowledges the really significant long term damage done by the bill and the attitudes that it represented. Its most devastating impact in his opinion was the damage done to the intangibles of trade: the expansion of consumption beyond domestic goods, commerce with and living among foreigners, and understanding their motives and concerns. He believes that these damages had a significant bearing on the subsequent growth of economic nationalism and the run up to World War II.
This point is worthy of further debate at another time, but I submit that it has some relevance to our current situation. If we encourage and/or pursue the growth of the attitudes represented by economic nationalism, it will have a huge impact on our interests, but will have even a greater negative impact on those developing nations who desperately need open access to world markets for their often limited competitive products. In fact, according to Bjorn Lomborg of the Copenhagen Consensus Center, the completion of the stalled Doha Round of free trade negotiations, now in their eighth year, would represent the biggest global stimulus package that we could otherwise design, producing $120 billion per year in direct gains by 2015, $17 billion of it going to the poorest countries.
Conversely, if we continue to stall these talks and block further progress in liberalizing trade with notions like “Buy American” provisions and unrealistic labor and environmental restrictions, it will not only damage our interests, but serve to alienate our potential partners and provide ammunition for the demagogues who prey on the emotions fired by economic nationalism.