One disturbing but predictable response to the global financial crisis has been the rise of legislation aimed at protecting domestic industries and jobs by various anti-trade measures.

  While we have seen examples of this across the spectrum, the most notable examples are the insistence by the Democratic congressional leadership in the United States to require that stimulus money come with “Buy America” strings and the “British Jobs for British Workers” strikes on the other side of the Pond aimed at avoiding an influx of cheap labor from Latvia and elsewhere in eastern Europe.

The good news is that there are signs that cooler heads are prevailing in both those cases, with compromises in the works.  But people are quite literally taking to the streets demanding that their governments keep their jobs safe during these troubled times.

WTO director-general Pascal Lamy sees such measures as catastrophic, saying, “If you start killing imports, you will kill exports.”  While he understands the political impulse to protect domestic economies during times of crisis, he points out, “That’s precisely why we have these rules, to avoid the slippery slope of protectionism.”

Willem Buiter, formerly EBRD’s chief economist and now a professor at LSE, is disgusted with the political class and grumbles that we can “have a global depression if we really continue to work at it.”

We can go down in history as the generation that created the Great Depression of the Noughties.  Just keep on beating the protectionist drums.  Keep on the footdragging that prevents effective qualitative and quantitative monetary policy easing in the Eurozone and the UK.  And go ahead with unsustainable fiscal stimuli in the US, the UK and elsewhere that will spook markets, push up long-term interest rates and raise the spectre of sovereign default by countries not belonging to the group of usual suspects.  Yes we can!  I hope we won’t.

President Obama signaled yesterday that he would work to kill the measure, telling Fox television, “I think it would be a mistake … at a time when worldwide trade is declining for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade.”  He made those remarks the same day that Gary Hufbauer and Jeffrey Schott of the Peterson Institute released a report “The negative job impact of foreign retaliation against Buy American provisions could easily outweigh the positive effect of the measures on jobs in the U.S. iron and steel sector and other industries.”

While elite opinion is mostly of the mind that this latest wave of protectionist sentiment is all political pandering and quite dangerous, there are some respectable dissenters.  For example, FT columnist Gideon Rachman has coined the word “deglobalization” to describe the phenomenon. And, he insists, it’s a good thing.

Financial protectionism is driven by the logic of the market and political pressure. Banks that have lost confidence and capital in the credit crunch are retreating to the home markets they know best. And because so many banks have been bailed out by national taxpayers, they are also coming under political pressure to lend at home rather than abroad.


But while the ideas that underpinned globalisation remain firmly in place, events are moving in the opposite direction. Newspapers strewn around the Davos coffee rooms told not just of a fall in global trade but of strikes in France, “buy America” legislation in the US, social unrest in Russia and anti-foreigner protests in Britain. The pledges made at Davos to “complete the Doha round” of world trade talks have now been made and broken so often, that they have the same make-believe quality as a yearly resolution to join a gym and lose a stone in weight.


Recent developments suggest that angry citizens will take priority over abstract ideas. Davos Man is losing control of events. The financial crisis demonstrated that globalisation had created an economic system more complex and more dangerous than the delegates gathered in Davos had ever realised. The inability of international politicians and businessmen to stop the drift towards protectionism looks like the next stage in the demolition of the Davos consensus.

TNR’s John Judis agrees, cleverly titling his take “Buy America or Bye America.”

If the U.S. enjoyed full employment, and a trade surplus, then a provision like this would be unnecessary, if not superfluous or harmful. But that’s not the situation in the U.S. today. We’re in a classic downward spiral that the private sector cannot hope to reverse by itself. The government has to step in to create demand for consumer and investment goods. And if it wants to create or preserve jobs, it has to make sure that the money is not used to widen the trade deficit.


But isn’t this Smoot-Hawley all over again? Not exactly. Smoot-Hawley put a tariff on broad classes of imports. This only affects government procurement. The U.S. also passed Smoot-Hawley at a time that it was running trade surpluses. It was truly a beggar-they-neighbor measure. This provision, if successful, might help the U.S. revive and even reduce its yawning trade deficit–which would have a favorable effect on the world economy that depends on a healthy American economy.

Of course, countries are going to complain–and some already have–but it’s likely that they recognize that the U.S. has to do something like this to ensure that its spending doesn’t simply disappear in a flood of imports. If they still insist, then the U.S. can have a talk with these nations about how to end global trade imbalances that have been caused in good measure by Asian countries pursuing export-led growth. In that respect, the Buy American provision will have been a useful negotiating ploy–call it a stimulus of a different kind–even if the American steel industry remains stuck in the doldrums.

Daniel Larison, writing for The American Conservative, would be happy to see globalism as we know it go away, although he questions the timing.

It is a bit frustrating that the moment at which creating protections for domestic industry and labor is most likely to be popular is also the moment when imposing those protections makes the least economic sense. Having pursued utterly imbalanced trade and immigration policies that harmed domestic industry and lowered wages during the expansion (ultimately worsening many Americans’ ability to cope with the eventual contraction), Western industrial states are faced by increasingly angry electorates that are facing prolonged recession after having been urged on to spend themselves into oblivion. The prosperity of globalization was financed by the total irresponsibility and lack of discipline that was positively encouraged and cultivated by policies of globalists: keep goods and labor cheap, flood the system with money, keep inflating various bubbles and tell people that they can have it all without any consequences. The real perversity of globalist policies is that they have so sapped national economies of their ability to be anything remotely like self-sufficient that any attempt to break out of patterns of dependence would be extremely painful. Instead of suffering the short-term discomfort of some higher prices that would have resulted from correcting flawed trade and immigration policies when times were better, our governments avoided making the necessary corrections and deferred responsibility.

BBC Europe editor and blogger Mark Mardell has been an especially able critic of the British measure.  He also highlights the chief problem in the case of a Europe without economic borders:

The fans of an economically liberal Europe-wide free single market might argue that what the workers in Lincolnshire fear is good for the economy as a whole. If Italian workers can do the job cheaper, then so be it. If Romanian workers undercut the Italians, then, they might say, even better. It’s also precisely why many on the left in Europe are suspicious of an EU that doesn’t put protections of workers’ conditions above everything else.

But it is even more fundamental than that. It highlights the obvious lack of a European identity, or what the left would call “European solidarity”.

Tufts prof and FP blogger Dan Drezner is hopeful that the mere fact of having had this debate will be salutary. “The extent of the global blowback, combined with the recognition that an economic recovery will require some serious policy coordination, might just be the slap of cold water to Barack Obama’s belief that trade was going to be a tertiary issue during his administration.”

The problem, though, is that Obama is just the head of one of three branches of government.  And, as Mother Jones blogger Kevin Drum notes, the political pressure on Members of Congress are enormous: “if you’re going to ask American taxpayers to pony up $800 billion to rescue the economy, then of course they’re going to want this money spend on American goods and services.”  And the pressures are likely greater in Europe and UK, since the expectation that government will ameliorate economic problems is much stronger there.

Dave Schuler, blogging at Outside the Beltway, notes the flip side of that:

Today’s economic downturn isn’t just taking place here. It’s worldwide, we continue to be a great trading nation propaganda to the contrary notwithstanding, and some of our trading partners are just itching to put protectionist measures of their own into place. Let’s not give them an excuse.

Well, then, how do we ensure that the big fiscal stimulus bill doesn’t mostly stimulate other economies? The short answer is we can’t. We can’t isolate ourselves from the rest of the world and trying to isolate our economy from that of the rest of the world is just beyond our ability. This isn’t the 1920’s.

What’s needed is a Bretton-Woods III rather than a Smoot-Hawley, Jr. Unfortunately, elites aren’t what they used to be.

Or perhaps deference to them isn’t what it once was.  Politicians are at the mercy of their publics and, mostly, that’s a good thing.  But it does have the negative consequence of making it much easier to appease short term interests even while doing long term harm.

The coming months will be a major test of our global financial institutions.  Free trade has been on the march, with the occasional hiccup, since the end of World War II and the long march from GATT to WTO.  More recently, regional free trade areas have grown in both number and scope.   But, as the late U.S. House Speaker Tip O’Neill told us, all politics is local.  I’m not optimistic of totally holding back the tide of protectionist sentiment.

James Joyner is managing editor of the Atlantic Council.

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