Don’t Trade Recession for Depression

If the 1930s taught us anything, it was that one way to make a depression “Great” is for countries around the world to go protectionist. The Smoot-Hawley Tariff Act, signed by President Herbert Hoover in 1930, is justifiably notorious for having triggered a disastrous cycle of trade conflict. Among the more insane examples of Depression-era trade policy was the “Egg War” between the United States and Canada, in which the Smoot-Hawley tariff on eggs prompted Ottawa to impose retaliatory duties on American eggs, drying up a once-lucrative source of income for farmers on both sides of the border. So there’s no chance that the world will go down the protectionist route again in any serious way, right?

That’s what I used to think, until recently. In the 25 years that I’ve been writing about economics, I’ve heard — and scoffed at — many a Cassandra-like warning that protectionism could soon rear its head. The ghosts of Messrs. Smoot and Hawley have been conjured up so often that they’ve lost their capacity to frighten us. But now that the breadth and depth of the global slump is coming into focus, I’m not scoffing anymore. Politicians are bound to feel increasing pressure to raise trade barriers, and those old scare stories seem a lot less far-fetched.

All of a sudden, an issue that has barely registered on most Washington radar screens — the stalemate in global trade talks — is starting to loom as a serious problem for the already reeling world economy. When negotiations in the Doha Round, as the talks are called, broke down on July 29, the news evoked shrugs, even from trade experts — and understandably so. This was just the latest in a series of setbacks for the round, which has dragged on for seven years. But here’s the catch: The Doha talks could have provided a meaningful insurance policy against protectionism. As the financial turmoil starts to weaken the “real” economies of many countries, the round’s failure is starting to look like a calamitous stumble for economic globalization.

The recessions that are now afflicting every major region of the world will make it difficult for governments to resist calls to protect their industries from foreign competition, especially when other countries also seem to be abandoning free-market policies. In the United States, the lure of protectionism will be all the greater because the plunge in many foreign currencies — from the South Korean won to the Brazilian real to the South African rand — will make imported products much cheaper in months to come. It’s not that President-elect Barack Obama and his advisers are anti-trade; they aren’t. But remember, it was President Bush, a supposedly ardent free-trader, who succumbed to demands from the beleaguered steel industry for stiff tariffs in 2002.

The revulsion against unfettered capitalism has been aimed thus far at the system governing flows of money; it is unlikely to spare the system governing the international flow of goods and services. Think the pledge by the leaders of the world’s biggest economies at their Nov. 15 Group of 20 summit to refrain from protectionist measures will work? The initial signs aren’t promising. No sooner had the leaders left Washington than Russia announced that it was going ahead with plans to raise substantial duties on imports, especially foreign cars. Chinese President Hu Jintao warned a meeting of top Communist Party officials last week that the global financial crisis might tempt other countries to give in to protectionism.

By turning down the Doha deal that was under consideration in July, the members of the World Trade Organization (WTO) passed up a package of measures that could have prevented countries from erecting significantly higher tariffs. The deal was hardly the bonanza for global growth that its boosters claimed; it would have left most existing trade barriers in place. But it did envision a reduction in “bound” tariffs, the legal maximums that countries can impose without incurring sanctions.

Like penitents seeking a last chance at redemption, the G-20 summiteers instructed their trade ministers to go back to the negotiating table and try to complete a detailed blueprint for the Doha Round this year, and WTO Director-General Pascal Lamy may summon those ministers to the trade body’s Geneva headquarters next weekend. Their optimism about landing a deal is based on a version of events that gained wide currency after July: that negotiators came tantalizingly close to an agreement on the main elements of the round, and that their failure was attributable almost entirely to discord over one technical matter involving farm tariffs in developing countries.

Unfortunately, a very different picture of that meeting emerges from interviews that I have conducted with a number of key participants. The meeting fell far short of the consensus required by WTO rules for an accord — and although U.S. officials sought to blame India and China for the failure to cut a deal, American industry and farm groups were profoundly dissatisfied with the accord that was taking shape. (VIew a full account, titled “The Nine-Day Misadventure of the Most Favored Nations“.)

Moreover, the plunge in the world economy has immensely complicated the prospects for reaching an agreement. The guts of the deal involve a tradeoff in which the United States and other rich countries agree to cap subsidies and protections for their farmers in exchange for greater assurances of access for their industrial products in developing countries. But the downswing in economic growth and the collapse of commodity prices have drastically stiffened political resistance to the deal in rich and poor nations alike. As a result, the effort to cobble together a deal in the waning weeks of the Bush administration smacks so much of legacy-burnishing by a discredited president that even staunch free-traders are questioning the wisdom of the exercise.

It would be one thing if the meeting contemplated for next weekend could fully conclude the Doha Round and lock in a reduction of bound tariffs. But even if WTO members miraculously agree in the next few days on a deal similar to the one envisioned in July, many months of negotiations would still be required to tie up all the loose ends. And even then, the pact wouldn’t be effective unless and until Congress approved it. Would the Obama administration pick up the cudgels for a deal that was bequeathed to it by the Bush administration and that lacks backing from industry and farm groups? I wouldn’t count on it.

The Doha Round’s travails also pose significant risks to the WTO itself. For all its flaws, the WTO is a crucial linchpin of stability in the global economy. It is the current embodiment of the multilateral trading system that was established after World War II to prevent a reversion to the grim days of the 1930s. The WTO’s rules keep a lid on the import barriers of its member countries, and members take their trade disputes to WTO tribunals for adjudication rather than engaging in tit-for-tat trade retaliation. The WTO is also the guardian of the “most favored nation” principle, under which member nations pledge to treat one another’s products on a nondiscriminatory basis — a valuable bulwark against trade blocs of the sort that stoked rivalries among the great powers during the ’30s.

The WTO’s centrality to the global trading system is already under some doubt, thanks to the proliferation in recent years of bilateral and regional trade agreements. More than 400 of these are currently in force, ranging from the big and well known (such as NAFTA) to the small and ridiculous (such as the Singapore-Jordan free trade agreement). Governments are increasingly tempted to think of these pacts as reasonable substitutes for multilateralism, especially as disillusionment deepens with the WTO’s ability to foster new global deals. Although the WTO is not about to disintegrate overnight, its authority might erode to the point that member nations start to flout their commitments and ignore the rulings of WTO tribunals. That would greatly increase the threat of trade wars and hasten a breakdown in the system that has helped keep trade blocs and protectionism at bay.

The complete termination of global trade talks is unthinkable. Nothing of the sort has happened since the ’30s. Previous trade rounds had very dark moments, too: The Uruguay Round, which was finalized in 1994, took eight years. One way or another, the Doha Round will get done eventually.

Those sentiments are articles of faith among many trade experts. Experience has taught them that, in the end, the self-interest of the community of nations in preserving the multilateral trading system always prevails. They are probably right. But the risk that they might be proven wrong this time looks uncomfortably high.