Protectionism may deepen global crisis

Protectionism may deepen global crisis
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First Published: Wed, Nov 19 2008. 10 59 PM IST

Updated: Wed, Nov 19 2008. 10 59 PM IST
Within three days of promising not to impose further tariffs, Russia and India raised them to protect domestic industries. Russia also tightened quotas while the European Union (EU) imposed anti-dumping duties. Creeping Smoot-Hawley-style protectionism, spurred by the false belief that it’s an antidote to recession, seriously threatens the global economy.
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The 1930 Smoot-Hawley Tariff raised duties on at least 20,000 items imported into the US from an average of 26% to 50%. Unlike most previous US tariffs, its purpose was not to encourage infant industries but to defend high-cost US manufacturers suffering sales declines early in the Great Depression. It was opposed by 1,028 economists but signed by president Herbert Hoover because of its supposed popularity—though at the subsequent mid-term elections the Republicans lost control of Congress.
More important, US international trade declined from $11.5 billion in 1929 to $3.9 billion in 1932, a drop of 42% in real terms, while world trade’s dollar value fell 60%. Other countries retaliated, notably Britain, which abandoned unilateral free trade and introduced a 10% Imperial Preference tariff.
Local hero: Finance minister P. Chidambaram. India imposed a 5% duty on a range of iron and steel products and a 20% duty on crude soya bean oil on Tuesday in a bid to protect domestic industry. Harikrishna Katragadda / Mint
The disastrousness of Smoot-Hawley is universally agreed, generating the statement against protectionism in last weekend’s G-20 communiqué. However, the economic forces that produced Smoot-Hawley—sales declines suffered by domestic manufacturers combined with aggressive pricing by foreign suppliers—are present in any sharp economic downturn.
Hence, while no massive tariff legislation is likely, the Smoot-Hawleyist impulse may manifest itself in innumerable minor actions.
These might include outright tariffs, as with Russia’s increase on used car duties or India’s modest new steel tariff. They may also take the form of reduced import quotas, as Russia has imposed on poultry and pork. A third weapon unavailable in 1930 is the “anti-dumping duty” which uses aggressive foreign competition to justify targeted tariffs such as the EU imposed on Chinese candles to which it will probably add screws and fasteners.
This downturn may indeed become Great Depression II if new tariff and non-tariff barriers force world trade to decline as it did in the 1930s. There are reasons for hope: Frequent summit meetings to discuss financial regulation enable trading partners to embarrass protectionists, and the World Trade Organization can file lawsuits against those who erect barriers. While these additional defences against Smoot-Hawleyism are important, the actions by Russia and India show that they may not be entirely sufficient.
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First Published: Wed, Nov 19 2008. 10 59 PM IST
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