The first quarter of this year has been a grim one for proponents of freer trade. While the G-20 will undoubtedly call for a successful conclusion of the Doha Round this week in London, no one expects it to happen. Last November the G-20 pledged not to engage in any protectionist policies, but as the World Bank pointed out last month, this was honored only in the breach. The Bank concluded that seventeen of the twenty countries had implemented a combined forty-seven measures to restrict trade at the expense of other countries. With the recession, global trade looks set to shrink for the first time since 1982. The WTO recently predicted a 9 percent reduction in cross-border trade for this calendar year.
Despite these depressing figures, most analysts do not believe that the global economy will see a reprise of the protectionist heydays of Smoot-Hawley. The Cato Institute's Dan Ikenson argued this month that, "Although some governments will dabble in some degree of protectionism, the combination of a sturdy rules-based system of trade and the economic self interest in being open to participation in the global economy will limit the risk of a protectionist pandemic." He has a point. After all, we live in a world of the World Trade Organization, the European Union and NAFTA. Even if there is some protectionist backsliding, no one is going to withdraw from the WTO. Absent that, what's the worst that could happen?
For the record, I believe this sentiment is correct-for now. With each passing month of contracting economies shedding large numbers of jobs, however, politicians will feel increasing pressure to use every tool in their arsenal to protect existing workers. It is an unfortunate rule in politics that industries vulnerable to imports are usually better organized than consumers.
This leads to an interesting thought experiment-could the major trading states enact high protectionist barriers while still complying with their WTO obligations? Unfortunately, this scenario is not too difficult to paint. Consider the following steps: