WTO Director General Pascal Lamy’s speech Wednesday at the University of California Berkeley is an outstanding survey of the value of global trade, even more valuable when the financial crisis is shaking global economies and public confidence. Facts, figures, history and the proper emphasis on multilateral trade negotiations (with only a passing nod to the shibboleth of global climate regulation, a guaranteed economy-killer):
Among the most disastrous political decisions taken in the wake of the Crash of 1929 was the passage of the Smoot-Hawley Act, signed into law on June 17, 1930. The idea of this ill-conceived legislation was to protect US farmers – a notion popular in many WTO member governments to this day. As farmers pressed to have greater protection from imports, many other industries joined the queue of lobbyists and as they often do, these lobbyists succeeded in gaining protection for their industries. Duties of more than 60% were slapped on 3,200 imported products, lifting overall average tariffs by about 20%. If the idea was to curb imports, Smoot-Hawley was a fantastic success – by 1933 imports had fallen from $4.4 billion to $1.3 billion while exports fell 69% over that same period to $1.6 billion. But there was an unintended consequence to Smoot-Hawley – its contribution to an economic depression. Smoot-Hawley touched off a domino effect of retaliation and counter-retaliation among trading partners which provoked a severe contraction of international trade, depressed growth and rising unemployment around the industrial world. From 1930 to 1932 the unemployment rate soared from 8.7% to 23.6% and remained at more than 14% for the remainder of the decade.
How did the collapse of trade contribute to this? One reason is that contrary to the conventional wisdom, imports are good for you. A great many Americans were then and are today employed in sectors linked to imports. Parts needed for manufacturing became dearer if they could be found at all. The soaring jobless rate was also a product of the response from other countries which were anything but pleased to be the target of trade sanctions. Predictably, these countries retaliated. US exports to Europe, for instance, declined from $2.3 billion in 1929 to $784 million in 1932. Globally trade contracted by 60% between 1929 and 1932.
If there’s anything good to be found in the financial crisis, it’s that it encourages a study of history, a study that study destroys the arguments for protectionism when economies fall into recession or depression.
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