« Gordon Brown, Sarkozy and the economic crisis. | Main | Gordon Brown, United States protectionism and the special relationship »

Protectionism and recession

Protectionism has been for a number of years a dirty word. It is now a term that seems to be creeping back into fashion. This tendency is politically understandable in an economic downturn as international trade can be easily represented as putting domestic jobs at risk. International trade is and always has been a domestic political issue, especially in a country such as the United States where protectionism has a long history. Trade involves exports as well as imports and anything that diminishes imports is likely to rebound on exports both as a result of other countries’ policy and also as a result of further downturns in international income levels leading also to a reduced demand for exports. There are forces working for and forces working against the growth of protectionism. Who is saying what and to whom?

The recession has ruffled the feathers of governments all over the world. In an economic crisis there is an almost automatic tendency to look after one’s own. It seems easy to put in a clause, as has happened in the United States, that a stimulus package should, as if is being financed domestically, restrict its direct benefits to domestic industry and businesses. This is politically appealing and, alas, also short-sighted if the principle aims of the stimulus package are to reduce the depth and the duration of a recession. The “Buy American” provision in the stimulus package in the United States has been watered down. The statement about buy American has been matched with a statement about making sure that international trade agreements are also honored. Europe, in the form of the EU, made it clear that it wished to avoid a trade war, an almost inevitable outcome of restrictive measures unilaterally imposed. The package now tries to match domestic actions to international expectations but nonetheless gives a lot of scope for domestic preferential treatment at fairly significant levels. The EU led the international lobbying against the ‘Buy America” clause. Other countries too were concerned about any contraction in world trade that might come about as a result of the protectionist drift in the United States. China was alarmed and given the Sino-US economy it is easy to see why. China is not however an entirely open-door economy. Canada has also been alarmed at the protectionist tone though Obama seems to have reassured the Canadian Prime Minster that NAFTA is safe.

Whilst the EU Commission is trying to ensure no increases in protectionism internationally, there are internal EU problems of a protectionist nature that are threatening the integrity of the common market. In the UK workers have protested against the employment of “foreign workers” (EU citizens working in the UK). It is the case that UK citizens working in the rest of Europe fall just short of the number of EU citizens from the rest of Europe in the UK. The situation with respect to the generation of incomes is complex. It is too easy to blame others for rising domestic unemployment. The President of France has set off an embarrassing row within Europe by developing a stimulus package for the French economy that asks recipients of state aid such as the car industry to protect jobs in France. This means, under falling market conditions, contracting production in other EU countries such as the Czech Republic. This has upset the Czechs. With this and other market developments, Eastern Europe is now suddenly seen as at risk.

Stimulus packages in individual countries, such as France, will work to some extent through the re-generation of state infrastructure. The EU must stick to the principle that such projects are open to EU-wide competition. Protectionism is an attempt to “export unemployment” but it damages export sectors both domestically and internationally, leads to the persistence of economic problems and further misallocation of resources. The same is true for the United States, and all other governments for that matter. Governments need to be very clear headed, even-handed and capable of taking a long-term view if they are to avoid making the economic situation worse. Leadership at times like these is at a premium.