Protectionism Is the Worst Protection

One of the causes of the Great Depression and, indirectly, the catastrophe of World War II was the growth in the early 1930s of protectionism -- that is, helping domestic producers gain unrivaled access to consumers by raising tariffs on imports. It is not surprising, then, that economists are worried that today's leaders might pour gasoline on the fire by hiking import tariffs and subsidizing exports in an effort to give their citizens short-term relief from the negative effects of the financial crisis.

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As part of the VoxEU.org project, the Center for Economic Policy Research in Europe recently asked 17 leading international trade experts to each write one chapter discussing the new protectionist measures that have been implemented in response to the financial crisis. The resulting book, edited by Richard Baldwin and Simon J. Evenett, is titled "What World Leaders Should Do to Halt the Spread of Protectionism." According to the World Trade Organization, the number of anti-dumping investigations -- one of the main protectionist measures available to WTO member states -- has shot up by 40 percent in 2008. Many countries have already begun raising import tariffs.

Even though increased protectionism is likely to prolong the crisis and lead to higher prices for consumer goods, WTO member states might significantly step up protectionist measures in the near future. The problem is that many of the moves to lower trade tariffs and subsidies for domestic industries in recent years have taken place outside the framework of the WTO. But there is a flip side to that. Many countries can now raise tariffs on industrial and agricultural goods without violating their trade obligations. If one group of countries raises tariffs and weakens its currencies, other countries can respond by dumping their goods, enacting special taxes and adjusting their subsidies for domestic manufacturers -- and all within the legal framework of the WTO. That is partly what happened during the last global financial crisis in 1997 and 1998.

The recommendations by the economists in the new book are fairly straightforward. First, governments should adopt domestic economic policies like those advocated by 20th-century British economist John Maynard Keynes and foreign economic policies more attuned to the ideas of 18th-century British economist Adam Smith. This means fighting the recession with monetary -- and not protectionist -- measures. Second, WTO members should finally complete the stalled Doha Round negotiations to reduce global trade barriers. Third -- and this is fully feasible -- they should create a mechanism for monitoring protectionism among the world's leading economies.

The fact that these recommendations are simple does not mean that they will be easy to carry out. True, 60 years of international cooperation on global trade gives hope that a knee-jerk reaction to throw up trade barriers will not recur. But the WTO Doha Round talks have been stalled for years and largely because of a deep disparity between the political influence of U.S. farmers and the lesser voice given to India's larger agricultural sector -- and it is not at all clear that the crisis will help eliminate such disagreements.

Russia, not being a member of the WTO, finds it even more difficult to refrain from protectionist policies. The government does not feel especially bound by its formal trade obligations, yet uses those same agreements to its own advantage in negotiations with domestic special interest groups and lobbies. The struggle against protectionism has become especially acute in Russia, where major industrial groups play a dominant role in politics and where many of those industries have practically merged with the state in recent years. But that does not mean that Moscow should give up struggling against them.

Konstantin Sonin, a professor at the New Economic School/CEFIR, is a columnist for Vedomosti.