The Global Economic Downturn

The Report : The Global Economic Downturn and Protectionism

Location: R40461

What do you learn:
With the world economies projected to contract by 1.3% this year the first such decline noted in the last half century concerns are being raised that trade policy may turn to a protectionistic tone. Economists note we could be heading in to a cycle in which trade disputes cause policymakers to adopt such things as the Smoot-Hawley Tariff Act (which is still on the book) which raised tariffs to 60% rather than the 10% today. The Report analyzes are we in a similar situation today simpatico with the Great Depression and World War I. There are three three senerios that the report lays out. 1) low impact in which trade rules are followed 2) medium impact whereas subsidies from industries like the financial sector and the auto sector debilitate the global trading system. 3) high impact because of large trade imbalances between nations such as China and the US would our stimulus spending or other nation's stimulus spending cause "free-rider" resentment.

The low impact school which is the first school reviewed in the report believes that it is completely overstated that the world is going protectionistic. They note that the WTO with its 153 members sets policies unlike those in the 1930's for a world that has many more multinational corporations. The report pans the Gold standard and notes that the WTO records that there has been no increase in the number of Anti-dumping investigations. The "Low-Impacters" also note the "Buy American" provisions of the stimulus bill has had only a limited impact on the global trade system

The Medium impact school believes that the subsides and stimuluses of sectors like the financial and auto sectors will cause nations to forget their multi-national agreements weaken the global trade. The report notes, thus far during this downturn, $48 Billion world wide and $17.4 billion in the United States has been given to the auto sector. Also they give the example that, 68% of the Royal bank of Scotland is owned by the government of the United kingdom. More broadly trillions of dollars have been given by 26 countries to stimulate their economies from potential collapse. However, the report believes that cases are unlikely to be brought before the WTO because of the multi-national ownership of car firms. The financial sector rescue does not violate multi-national agreements and it could weaken the rules but yet it has been the genesis of much global cooperation to deal with the crisis.

The High Impact school ascribes that since there are countries that are saving more than those that aren't there is an imbalance of current account surpluses which the report notes at about $2 Trillion dollars, the problem can be remedied by declines in consumption or investment to reset trade. For the 5% that the US economy is going to decline, China will have to consume 17% more in GDP to make the system much more harmonious.

So what can Congress do? The Report recommends that A) Congress coordinate Stimulus programs with other governments and Treasury Secretary Tim Geitner has done so by recommending each G20 country to spend 2% of GDP on stimulus with the IMF playing a watch dog role if each country has followed that goal. B) That Trade Barriers need to have far more public scrutiny and that under previous crisises the tariffs lasted for decades because no one knew about them C) How we manage Trade through the WTO could provide a backstop from constituent pressure for tariffs and that dropping trade barriers may be the answer to the current crisis.