Protectionism

Guys from many days I was thinking write about the Protectionism in this crisis hour & its ill effects on the overall economy. But due to some reasons I couldn't... Even in The Great Depression time US did this mistake only & suffered severely. Today I read an article relating to this topic in Deccan Herald by Alok Ray.. I am posting that only.

As the economies the world over are going deeper into recession, economic nationalism is rearing its head everywhere. The US Congress is pushing for the introduction of a “Buy American” clause in its stimulus plan that would require that the projects financed by stimulus money use American-made steel, construction materials and machinery.

More restrictions on granting of H1-B work visa for foreign workers (which would affect Indian IT professionals) are also being talked about. Earlier, US government had committed $15 billion to help troubled US auto makers. In UK, workers are staging massive rallies against the use of foreign workers in domestic construction projects.

Spain is paying foreign workers lumpsum unemployment benefits to go back home and not return for at least three years. Following the US lead, governments in UK, France and Germany are also providing subsidies in different forms to their auto industries.

Dubai is not renewing work permits for foreigners which is causing a crash in property and car prices there and would adversely affect remittance receipts for many countries in future (though there may be a one-time surge of inflows as the returning workers bring home their accumulated saving from abroad). Many European governments are pushing their bailed-out banks to lend money only to domestic borrowers. Indian government, too, has raised import tariffs on some steel products.

Governments would justify their decisions by arguing that when tax- payers’ money is being used to fight recession and job loss, this should be used to stimulate demand for home-produced goods. Otherwise foreigners gain income and jobs at the cost of the domestic taxpayer. Moreover, some economists in the US are arguing that this is not ‘beggar-thy-neighbour’ policy (which all economists are usually against) since the ‘Buy American’ provision applies to only additional expenditure financed by the stimulus money.

In other words, the expenditure on goods produced by the rest of the world would not go down below what it was before the stimulus. In fact, even after buying American goods, some of the additional expenditure would fall on the goods produced by the rest of the world. So, the others are going to have some net increase in demand, despite the ‘Buy American’ clause. According to this view, other countries are free to have their own stimulus packages to stimulate their economies and shouldn’t expect the American tax-payers to do it for them.

The trouble with this argument is that the rest of the world may not see it this way. It is not the economists’ fine logical argument but what the people perceive to be the reality which counts in policy making. For example, Gregory Mankiw, who was the Chairman of the Council of Economic Advisors for some time during the Bush administration, was virtually forced to resign from the post for suggesting that the outsourcing of service jobs to countries like India is like any other trade and trade benefits for the US economy.

However much some economists may argue to the contrary, US labour believes that their job loss is primarily because of competition from cheap Chinese, Indian and Mexican labour. In the same way, both labour and business in the rest of the world may regard these American moves to be protectionist and would like to retaliate by restricting imports from the US.

As Prof Jagdish Bhagwati has rightly pointed out, there are many WTO-compatible ways by which tariffs can be raised. For example, the actual tariffs for many products in India are currently below the “bound” tariffs (maximum permissible under WTO rules). So, the Indian government may well be tempted by the American action to raise their actual tariffs towards the “bound” rates without violating any WTO obligations. India can also switch their purchase of jet aircrafts from Boeing to Airbus.

If a large number of countries do the same in “retaliation” which prompts others (including the US Congress) to retaliate, the volume of trade (and jobs) for all of them would follow a downward spiral, which may eventually turn the recession into another ‘Great Depression.’ This is what happened in the 1930s: Great Depression, following the protectionist lead taken by the US by its passing of the infamous Smoot-Hawley tariff in 1930, despite an open petition by thousands of American economists against the bill.

As Pascal Lamy, the head of the WTO, has put it: “Scapegoating the foreigner is an old trick in politics.” The problem is that all foreigners are the natives of some other countries who in turn would scapegoat the foreigners and so on.

Some think that globalisation is irreversible. They do not study their history books well. The earlier wave of globalisation following the invention of steam engine-powered trains and ships, telegraphs and telephones and accompanied by massive expansion of international trade, capital flows and migration, basically came to an end at the start of the First World War because of political forces.

The current wave started only after the disastrous consequences of the Great Depression and the Second World War convinced the political decision-makers that virulent nationalism (both political and economic) needs to give way to globalisation again for the benefit of mankind. So, there always exists the danger of political forces reversing economic globalisation, irrespective of the revolution in transportation, information and communications technologies.