Financial Times (11.9.09)

Broken promises

By Alan Beattie

A year ago, when the Group of 20 heads of government held their first major meeting, the threat of trade protectionism was one of the most important problems they faced. That, at least, was the impression any casual observer would have got from their thundering proclamations that trade barriers would not be thrown up around the world’s economies.

Just as the world’s central banks were not going to repeat the mistakes made after the 1929 stock market crash by keeping monetary policy tight, so the commerce ministers would not reproduce the chaos-stricken global trading system of the 1930s. Nor, for that matter, would finance ministries of the rich world fall into the same trap as their counterparts during the Great Depression and try to balance their budgets in the face of a massive shock to demand.

Many references were made to Smoot and Hawley, the US senator and congressman whose tariff bill of 1930 set in motion a global round of tit-for-tat increases in trade barriers that took many decades to undo. But the G20 pledge has already been comprehensively broken by most of its signatories. When Barack Obama, the US president, imposed a “safeguard” measure on Chinese tyres in September, there were concerns that a symbolic step had been taken that could open the floodgates. Free-traders in Washington, meanwhile, including several former members of George W Bush’s administration, lined up to denounce the move as retrograde.

The move – a so-called “Section 421” after the relevant section of US trade law – was a particularly potent trade weapon that had been negotiated as part of China’s accession to the World Trade Organisation in 2001.

Unlike most other forms of so-called “trade defence”, such as “anti-dumping” tariffs on goods priced unfairly low, or “countervailing duties” on imports deemed to have been subsidised by governments, this measure does not even require the US to show that its industries have been hurt – merely that imports are rising rapidly.

While Bush turned down multiple applications for Section 421s, Obama accepted the first one proposed to him. Depending on who you talk to, this was either a disastrous capitulation to the forces of protectionism, or a robust championing of the rights of US workers threatened by unfairly priced and subsidised Chinese imports.

Tony Fratto, a former White House deputy spokesman under Bush, said the fact that the news was released late on a Friday night suggested that Obama’s White House was rightly embarrassed. “I would call the decision ‘shameless’, but clearly the White House had enough shame to try to bury the news in the dark of night,” he wrote in a blog post. “Nine months into his presidency, Obama is demonstrating neglect – if not outright hostility – to trade expansion.”

The fact that US tyre manufacturers had not even supported the petition was seized on by its opponents as evidence that it had more to do with appeasing trade unions in the steel industry, which supplies tyremakers.

But among the growing number of Democrats in Congress who are sceptical of the benefits of free trade, the decision was entirely justified. Sandy Levin, a Democratic congressman and chairman of the trade subcommittee of the House of Representatives’ ways and means committee, which has jurisdiction over tarriffs, believes globalisation needs to be managed.

“Trade liberalisation and expansion can provide tremendous benefits to workers and businesses both here and abroad,” he wrote.

“But a sudden ‘market disrupting’ surge in imports (in this case, more than a doubling of imports … ) can cause more harm than good to the economy.”

Whether or not the first Section 421 will open the floodgates to a whole series of such actions remains unclear. But one thing should be considered by those wanting to portray this, and a stream of similar decisions by many countries, as a modern-day Smoot-Hawley measure.

According to research by Chad Bown, a trade economist at the World Bank, the value of trade about which new “investigations” – the first stage in emergency import restrictions – were begun between the first quarter of 2008 and the first quarter of 2009 was no more than 0.4 per cent of imports for the European Union and the US – a negligible amount. Bown believes existing World Trade Organisation rules appear to be having an effect in constraining government actions.

With trade apparently recovering after its precipitate drops this year, the chances that the world will avoid a repeat of the 1930s calamity appear good. If the recovery turns out to be slow and halting, and if a period of below-trend growth means that unemployment keeps rising, there may be more Chinese tyre decisions on the way.

But at the current rate, it will take a very long time for such a string of decisions to make anywhere near the impact on the modern world economy as the blanket Smoot-Hawley protectionism of the 1930s.