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Trade Backsliding
Small signs of protectionism are popping up around the globe.

Thursday, April 23, 2009

ONE OF the many dangers of the global economic downturn is that it could cause countries to turn inward, with even the best of free-trade sentiments replaced by protectionist tendencies. Some taxpayers -- understandably, perhaps, but mistakenly -- believe that only money spent within their country's borders helps to expand their domestic economies. Thus, political pressure to circumvent or walk away from international trade standards mounts.

We have seen this with the "Buy American" provisions initially stuck into the stimulus bill, which President Obama wisely persuaded the Senate to alter, as well as restrictions on the operation of Mexican trucks in the United States. We are seeing evidence of this creeping protectionism around the world, as well. In its recent effort to "name and shame," the World Trade Organization published a long list of countries that have made counterproductive trade changes ranging from providing direct aid to sectors of their economies, such as autos, footwear and steel, to manipulating tariffs. In looking at instances of protectionism since November's Group of 20 meetings, the World Bank found that 17 of the 20 members, all of whom signed on to the group's communiques pledging to avoid protectionism, have adopting measures restricting trade.

The good news is that trade infractions have not yet begun to do major economic damage. As the WTO report says, "There is no indication of an imminent descent into high-intensity protectionism, involving widespread resort to trade restrictions and retaliation." Moreover, some violations that would be viewed as outrageously anticompetitive in normal times, such as aid to a country's financial sector, are a necessary evil right now. The risk, however, is that even protectionism that might help to achieve short-term economic goals could set off retaliatory measures. Canada, for instance, has responded to the U.S. auto bailout by taking actions to subsidize its own auto industry. Mexico has responded to U.S. truck restrictions by slapping new tariffs on U.S. exports. Even Paraguay has a "Buy Paraguayan" policy.

Already, the WTO estimates that exports will drop a dramatic 9 percent worldwide this year. Further protectionist measures would cause even greater deterioration, making global economic recovery more difficult. Dollars that flow from the United States to other countries, for instance, help to create greater demand for U.S. exports. Reduced opportunities for trade push up prices for consumers, here and elsewhere. One of the keys to coming out of this global slowdown will be keeping the channels of free trade open, not backsliding into a downward protectionist spiral.

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