The Free Trade Lesson; Avoiding Protectionism and Interventionism Is Key to Ending Global Malaise

Article excerpt


The world learned at least one lesson from the Great Depression. Despite today's economic gloom which has spread from the United States to Europe and now Asia, no major player has moved to introduce protectionist policies or impose capital controls on a large scale.

That's a good thing, considering the trade war sparked by the infamous Smoot-Hawley Act of 1930. This measure raised U.S. tariffs on 20,000 goods to record levels and triggered retaliatory tariffs by our trading partners. Countries also imposed nontariff barriers, like quotas, to keep imports out. The net result was that the Great Depression was prolonged and intensified as nations closed their borders, shrinking international trade by a third between 1929 and 1932.

We have not seen anything like that during this Great Recession. The General Agreement on Tariffs and Trade (GATT) ratified in 1947 has been modified in several rounds of the ensuing years with countries steadily agreeing to open their markets further each time. The Uruguay Round of trade talks in 1986-94 ended with the creation of the World Trade Organization, although the current Doha Round has been at a standstill for a long time.

Instead of backsliding into protectionism with the dual hits of a global slowdown and multilateral negotiations stalled, what we see is countries seeking to conclude regional free-trading arrangements (FTAs). India and Japan signed a FTA in February of this year. The European Union signed one with South Korea in July. The EU and India are negotiating an agreement now. …