Made in _______

Story Highlights:

• Many fear some countries are caving into domestic industries' demands for import protection—and that protectionism will make an already bad global economy much worse.
• In our view, this new push for protectionism is mostly a political response to the economic downturn and isn't likely to turn into a Smoot-Hawley redux.
• As well-intended as protectionist measures may be, history shows manipulating competition to favor one country ultimately adds new economic strains and compounds existing economic slowdowns.
• Current protectionist talk is likely no more than political rhetoric.

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Sometimes eggs create puzzles without definitive answers (as in, which came first—chicken or egg?). Other times, they illustrate a much clearer point. In the 1930s, under the Smoot-Hawley Tariff Act, the US increased tariffs on eggs imported from Canada from eight to ten cents. Egg imports from Canada to the US subsequently fell 40%. Canada responded by increasing tariffs on eggs imported from the US from three to ten cents. US egg exports to Canada fell from 11 million in 1929 to 200,000—or, 98%.* Smoot-Hawley punished, rather than helped, the US.

History is littered with such lessons. The ill-conceived Smoot-Hawley showed global governments how protectionist policies during global economic crises can worsen the situation. Protectionism is rarely a one-way street, and its escalation becomes broadly damaging. But no one said governments are the best pupils. In this current global downturn, many fear some countries again appear to be caving into domestic industries' demands for import protection—and that protectionism will make an already bad global economy much worse.

It's true some nations are considering or implementing some degree of protectionism. India raised tariffs on steel. Ecuador lifted tariffs across the board. Indonesia is requiring special import licenses. The US is considering including "Buy America" provisions in the forthcoming stimulus plans. But in our view, this new push for protectionism is mostly a political response to the economic downturn and isn't likely to turn into a Smoot-Hawley redux.

Protectionism can be politically attractive because, at certain times, it has public appeal. It can be positioned as a boon to struggling domestic businesses, appease citizens who are afraid of unemployment, and emanate a sense of, arguably misguided, patriotism. Of course, as well-intended as protectionist measures may be, history shows manipulating competition to favor one country ultimately adds new economic strains and compounds existing economic slowdowns. Retaliatory responses are common (governments tend to act when another intentionally skews competition), hurting domestic export businesses. Additionally, protectionism also hurts domestic consumers, because they have less choice in what price to pay for goods and where to buy from.

Still, current protectionist talk is likely no more than political rhetoric. Countries manipulate trade policies all the time for a number of reasons. (The current World Trade Organization framework allows for some increases in tariffs, as long as they remain below certain levels.) The important red flags are radical, sweeping trade policy changes—which we have yet to see. Overall, the world is still trending towards freer trade.

Global trade is not as imperiled as some headlines declare—these protectionism fears exemplify the wall of worry recovering markets typically climb.

*Source: https://cafehayek.typepad.com/hayek/2007/06/more_on_smootha.html