The collapse of global trade, murky protectionism, and the crisis:

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VOX Research-based policy analysis and commentary from leading economists gar my neighbour" policy. The US is not diverting a given aggregate world demand to itself at the expense of other countries. Rather, it is a case of not rewarding your neighbours when you stimulate spending and are adding to world demand. These neighbours should be doing their own spending to reflate their own economies. And, such protectionism by the US will in fact therefore stimulate other nations into doing their own stimulus packages. This is a naïve argument, because other nations are not going to see the US protection in this light at all. Instead, they are going to respond in kind, as indeed they did in the 1930s after we enacted the Smoot-Hawley tariff in 1930. WTO-consistent protection can elicit WTO-consistent retaliation Since some do worry about thus undermining the WTO which has inherited from the GATT the many roadblocks to re-enacting that history of mutually harmful outbreaks of trade barriers. They have argued therefore that the US can enact WTO-consistent procurement rules by excluding from US procurement China and India, among other developing countries, which have not signed the optional Procurement Code. But remember that these nations can also retaliate in WTO-consistent ways. They often have "bound tariffs", i.e. ceilings, which are significantly above the "applied", i.e. actual, tariffs; and it is possible to raise the applied tariffs towards the bound levels, without any restraint at all. Nothing would prevent India and China from choosing to raise tariffs thus on items of export interest to the US. Besides, they could shift their own purchases of airplanes away from Boeing to Airbus, and of nuclear reactors from American to French firms. The response would, of course, be for the enraged US Congressmen to start enacting their own retaliation. The game would become lively. The notion that the US would continue to be a player and the referee no longer works; so we would have a Hobbesian chaos. China exchange rate bashing The accusation that China "manipulates" its exchange rate, which also promotes protectionism towards it, is another important cause for worry. Most Senators are convinced that the issue is clear-cut. It is not. The Washington magazine, The International Economy asked over 60 well-known economists: at what level should the Chinese currency be set? The answers, including from some of our deepest thinkers on exchange rates, were revealing. Some, including Milton Friedman, wanted a float. Ron Mckinnon and Richard Cooper wanted to keep the currency at existing levels. And those who wanted revaluation fell into as many as eleven groups ranging from 5% revaluation to 40% and over! The testimony of Secretary Geithner could only be explained by the fact that the White House was fielding a candidate flawed by tax-filing errors and China-bashing was a way to keep negative votes down. Obama's leadership needed now President Clinton marred the first year of his Presidency by indulgiFng the Japan- 40
The collapse of global trade, murky protectionism, and the crisis bashers whom he had cultivated in his campaign. President George W. Bush succumbed also to steel protectionism in his first year. They had time to change, however. But President Obama, in the midst of a historic economic crisis, can ill afford to repeat this pattern: he has to fight protectionism right away or live to see the virus spread beyond control. Indeed, he now needs to take a bold, comprehensive overview and confront the real danger that the open economy might unravel in terms of trade, multinational investments and immigration, first in the US and then, by imitation and example, worldwide, thus undermining the unprecedented prosperity and significant reduction in world poverty that openness has brought in the postwar period. Is it too much to expect that he will turn his remarkable oratorical gifts to make a historic speech in this vein at the April meeting of the G20, drawing a truly firm line in the sand against overseeing complacently a protectionist epidemic in America, and inspiring the other leaders to follow him in this crusade? About the author Jagdish Bhagwati is University Professor, Economics and Law, at Columbia University and senior fellow at the Council on Foreign Relations, New York. He has been Economic Policy Adviser to then GATT Director General Arthur Dunkel, Special Adviser to the UN on Globalisation, and External Adviser to the WTO. He served on the Expert Group appointed by the Director General of the WTO on the Future of the WTO and the Advisory Committee to Secretary General Kofi Annan on the NEPAD process in Africa as well as member of the Eminent Persons Group on the future of UNCTAD. His latest book is Termites in the Trading System: How Preferential Agreements Undermine Free Trade (Oxford, 2008). 41
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