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ANALYSIS

Out of Gaps In Treaties, First Salvos Of Trade War

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By Anthony Faiola
Washington Post Staff Writer
Sunday, February 1, 2009

The world may be on the brink of a gentler kind of trade war.

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In 1930, Congress fired the first shot in a protectionist battle that prolonged and deepened the Great Depression. After passing a bill aimed at saving American jobs by effectively barring 20,000 imported goods, including French dresses and Argentine butter, other nations retaliated by raising their own barriers on U.S. products, effectively bringing global commerce to a halt.

In the aftermath, organizations like the World Trade Organization sought to ensure that never happened again. Nations agreed to put on economic straitjackets permitting them to raise tariffs within hard-fought limits. That is likely to help prevent a repeat of the devastating and overt trade wars seen during the Great Depression, since it is now far harder for nations to increase tariffs on a wide array of imports at once.

But there remains a surprising amount of wiggle room in international trade and commerce treaties, and that, analysts say, is where the battle is now being fought as leaders worldwide face intense pressure at home to protect domestic jobs in the deepening financial crisis. They are engaging in a more subtle form of protectionism that often skirts those rules.

This weekend at the World Economic Forum in Davos, Switzerland, the annual event drawing the world's leaders, luminaries of industry, commerce and philanthropy, a host of dignitaries raised a crescendo of alarm over growing economic nationalism. "We will resolutely fight protectionism," Japanese Prime Minister Taro Aso told reporters there, giving voice to the general sentiment.

Yet even as leaders call for nations to do the right thing on the international stage, actually doing it at home is proving far tougher.

British Prime Minister Gordon Brown, for instance, delivered a particularly impassioned plea for nations to remain on the path of free trade yesterday. "This is not like the 1930s. The world can come together," he said. However, back in Britain, the government is directing British banks with global operations now being rescued with taxpayers' dollars to boost lending to British businesses and citizens first.

Although that may violate the spirit of globalization, current laws regulating financial commerce remain far behind those regulating manufactured goods. It is leaving countries where British banks did big business in the past -- particularly in Eastern Europe -- facing fewer and fewer options to cope with the global credit crunch.

"You're going to see a lot more rhetoric out of leaders against protectionism, but what really matters is their policies," said Simon Johnson, former chief economist at the International Monetary Fund and a professor of economics at MIT. "And there are worrying signs right now that they may not be so serious about stopping protectionism."

Additionally, the European Commission is reinstating subsidies on some dairy products to protect its farmers, targeting an area of trade law that remains highly contentious, open to interpretation and potentially damaging to developing countries. Analysts are also bracing for nations to make excessive use of the legal tools now available to them to fight unfair trade, such as filing anti-dumping cases before the WTO.

The nations that signed a Nov. 15 agreement at the G-20 summit in Washington promised to refrain from imposing "protectionist" measures for at least 12 months. Since then, however, a large number of signatory nations have broken that promise.

Current trade law is more strict on rich countries, granting more flexibility to developing nations to raise tariffs. Many are exercising those rights with gusto now. Indonesia last month raised new trade barriers on electronics, garments, toys, footwear and other imports. That is happening at a time when the IMF and World Bank say that global trade is set to shrink for the first time since 1982.

In the United States, a move to greatly expand Buy American provisions as part of the $819 billion fiscal stimulus package has generated shock waves in other countries, with Canadian and European officials in particular rising up in protest. The provision, passed by the House on Wednesday, would mostly bar foreign steel and iron from the infrastructure projects laid out in the stimulus package. A Senate version still being considered goes further, requiring, with few exceptions, that all stimulus-funded projects use only American-made equipment and goods.

Yet depending on how the language on a Buy American provision may ultimately read, experts on trade law say it remains unclear whether it would categorically violate a WTO agreement on government procurement the United States signed in 1996.

"There are lots of institutional firewalls to prevent trade wars that exist today that did not exist during the Great Depression," said Gary Hufbauer, senior fellow with the Peterson Institute for International Economics. "That could help now. But there is still a lot of room for damage, maybe pretty bad damage, that can be done in the gray area of the rules."

Although the legality of the Buy American provision may be in question, that might not prevent a potentially dramatic series of countermeasures by America's trading partners if it is passed and signed by President Obama. For that reason, analysts are seeing it as a major test for Obama, arguing it could signal that the United States may be changing course from a decades-long embrace of free trade because times are now too tough to maintain that path.

"I hope the senators will be wise enough . . . to make sure the U.S. complies with its international obligations," said Pascal Lamy, the head of the World Trade Organization, in Davos yesterday.


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