Smoot-Hawley's ghost reappears

Who's kidding whom? Finance chiefs at last week's Group of Seven meeting in Rome were busy congratulating one another for their collective skill in addressing the world's economic problems and broadcasting their commitment to battling protectionism.

Truth be told, the global economy's big nations - as well as emerging-market ones - are coming up short on both counts. Many are unilaterally adopting protectionist measures.

The rising protectionist tide hasn't reached crisis proportions yet. But the camel's nose is under the tent.

Unless governments get serious about arresting the trend soon, the chatter about 2009 morphing into a replay of the Great Depression will become a self-fulfilling prophesy. The US Smoot-Hawley Tariff Act of 1930 increased duties on more than 20,000 goods, inviting retaliation by other countries. Within two years of the law's enactment, global trade declined 70 per cent.

The consequences of a trade war are ugly: reduced industrial production, rising unemployment, social unrest, stymied growth, shrunken profits and tumbling equity markets. There have already been protests or riots in Russia, Greece, China, the UK, France, Latvia and Iceland.

In short, everything the global economy is currently suffering from would be magnified. It might also spell the end of globalisation, the first era of which began in the 1880s and ended with the outbreak of World War I in August 1914.

"An open system of global trade and investment is indispensable for global prosperity," the G7 said in its communique on February 14. "The G7 remains committed to avoiding protectionist measures, which would only exacerbate the downturn; to refraining from raising new barriers; and to working towards a quick and ambitious conclusion of the Doha Round."

The sentiment is right. Unfortunately, the message is lost. First, the so-called Doha round of talks, which began in 2001, to ease trade restrictions on goods and services for the benefit of poor countries, are dead until the global economy emerges from its current crisis.

Second, not all governments are listening. "It's unbelievable to blame France for protectionism," French Budget Minister Eric Woerth said this week about government plans to aid automakers. "We need to protect our interests, our citizens, our companies."

The US $787 billion stimulus legislation contains a "Buy American" clause that stipulates that public works and building projects funded by the programme use American-made goods, including iron and steel. US Treasury Secretary Timothy Geithner has said America will comply with US commitments to the World Trade Organisation (WTO). Nonetheless, the Chinese are angry, the Europeans critical and the Canadians nervous.

French President Nicolas Sarkozy criticised French auto companies for outsourcing production to the Czech Republic. Italian Prime Minister Silvio Berlusconi, in announcing two billion euros ($2.5 billion, Dh9.4 billion) in rebates for trading in older cars and home appliances, said Indesit SpA should drop plans to close a dishwasher factory in Turin in favour of a site in Poland.

Russia has increased duties on automobile imports. China has re-established tax breaks for exporters. India has imposed limits on steel imports, and boosted soybean tariffs.

Defeating protectionism won't be easy. Still, the battle must be engaged.

Leaders must understand that international trade is too valuable to be used as a tool to get votes. During the campaign for the Democratic presidential nomination, US President Barack Obama and Secretary of State Hillary Clinton both bashed the North American Free Trade Agreement. UK Prime Minister Gordon Brown's 2007 remark "British jobs for British workers" has returned to haunt him.

Countries with large foreign exchange reserves should extend funds to the International Monetary Fund (IMF) for lending to countries that lack access to global capital markets. Japan last week committed to providing the fund with $100 billion. But more can be done. China, Japan, Taiwan, India and the Organisation of Petroleum Exporting Countries (Opec) have a total of $3.95 trillion that can be put to work.

Multilateral organisations, regional development institutions and major central banks should cooperate with private lenders to offer and guarantee trade financing. About 90 per cent of world trade depends on some form of financing.

The US must lead the rest of the world in resisting protectionism's temptations, and Obama must take the initiative. Congress won't.

Complete the Doha talks. It would show that countries can cooperate and that trade isn't dead.

The best way to defeat protectionism is to resist our own worst impulses. That, though, seems beyond the ability of many politicians right now.