The Great and Threatening Evil of Trade Protectionism : Meet the prospective new Iron Curtain of the post-Cold War era

Star wars. The Cold War. Trade wars? Economic standoffs over access to world markets could fast supplant military and nuclear tensions of yesteryear, should protectionism succeed in upsetting the global trading order. Will protectionism be the new Iron Curtain in the post-Cold War era?

Protectionism is potent political fodder when times are tough. And in this election year, President Bush’s foes are fanning the fires of protectionism just as 108 nations try again--for the sixth year--to liberalize world trade. Protectionism is the economic counterpart of isolationism. Neither serves our national interests.

Bush is still smarting from the fiasco of his trade mission to Japan. Congressional Democrats have moved fast to seek new limits on imports of Japanese cars. Chrysler Chairman Lee Iacocca, unhappy with his Tokyo visit, has been demagoguing away at Japan because he didn’t get a big car order. Republican presidential contender Patrick Buchanan is slamming Bush’s free-trade politics in his isolationist “American First” diatribes.

In hard times, the instinct is to protect home markets from import competition. The emotional appeal to out-of-work citizens is understandable, but protectionism invites retaliatory actions--tit for tat. Worse yet, it can exacerbate rather than relieve economic problems on the home front. That was precisely the case when the United States went on a protectionist binge in the 1920s that hit a high point with the disastrous Smoot-Hawley Tariff Act of 1930. That was the opening volley in trade wars that helped to prolong the Depression and push world trade in 1939 below the level of 1914.

That painful lesson was costly, but since then the focus has been on liberalizing trade. Since 1947, seven rounds of world trade talks have been held under the auspices of the General Agreement on Tariffs and Trade (GATT). During that time, tariffs on industrial goods have plummeted to 4.7% from about 40%. World trade totaled more than $4 trillion in 1990, compared to $60 billion in 1947. Currently, a boom in U.S. exports has saved the nation from a much worse recession.

Under GATT, trading nations commit to more open exchanges of goods than they might otherwise because of domestic political pressures. GATT’s “dispute resolution” panels helped to prevent full-scale trade wars when the United States and the European Community waged war over poultry subsidies in the 1960s and a pasta war two decades later. U.S. complaints to GATT about Japan’s closed beef and citrus markets got the message across to Tokyo to open those markets.

The current Uruguay Round of talks involves stripping export subsidies from farm products and embracing, for the first time, services, intellectual property rights and investments under international trading rules. But frustrations are high as the talks have repeatedly stalled and dragged on nearly 6 years. The United States and the EC have been at odds over agriculture, the big delay in reaching a new agreement. The French, in particular, have been obstinate. Japan, as usual, is sitting on the sidelines, unwilling to open its closed rice market to imports.

A failure of the Uruguay Round could undermine confidence in GATT. Many countries, particularly developing ones, may rethink the question of access to their markets, resulting in a drift toward managed trade and regional trading entities that would act as blocs instead of trade expediters. That, in turn, could give rise to “muscular bilateral diplomacy,”--resorting to unilateral solutions to resolve country-to-country trade disputes, says Robert E. Hudec, an international economics law professor at the University of Minnesota. “It’ll be an easier time for protectionism.”

Closing markets or erecting barriers to trade would raise consumer prices and shield inefficient industries. An era of protectionism would result in an economic Dark Ages.