The Transitioning Political Phase: Shadows of Smoot Hawley and Financial Crisis Claims First Government-Belgium

We are now entering into the political phase of the current global crisis.

To begin with, the modern day version of the Smoot-Hawley Act seems to be in the process of resurrection.

This from Washington Post (bold highlights mine),

``Only a few weeks after world leaders vowed at a Washington summit to reject trade protectionism and adhere to free-market principles as they combat the global financial crisis, a host of nations are already breaking that promise.

``Moving to shield battered domestic manufacturers from foreign imports, Indonesia is slapping restrictions on at least 500 products this month, demanding special licenses and new fees on imports. Russia is hiking tariffs on imported cars, poultry and pork. France is launching a state fund to protect French companies from foreign takeovers. Officials in Argentina and Brazil are seeking to raise tariffs on products from imported wine and textiles to leather goods and peaches, according to the World Trade Organization.

``The list of countries making access to their markets harder potentially includes the United States, where critics are calling the White House's $17.4 billion bailout of the U.S. auto industry an unfair government subsidy that would put foreign competitors at a disadvantage.

``Though still relatively narrow in scope, the moves, observers warn, in the coming months may grow into a broader wave of protectionism. That could worsen the global financial crisis by further choking world trade, which is already facing its first decline since 1982 as the world economy sharply slows and demand dries up.

``In hard times, analysts say, nations are more inclined to take steps that inhibit trade, often with dire consequences. Trade restrictions imposed by countries trying to protect domestic industries in the 1930s, for instance, escalated into a global trade war that deepened and prolonged the Great Depression.

``Exporting firms tend to be innovative, dynamic and capable of generating good job growth," said Eswar S. Prasad, a professor of trade policy at Cornell University and senior fellow at the Brookings Institution in Washington. "If trade restrictions caused by trade wars shut them down, their suppliers shut down, job losses get worse, and you can quickly have a spiraling downward effect on the entire economy."

``To be sure, most of the measures taken to date appear to be within the limits of current international trade treaties, which grant countries some room to raise tariffs and contain loopholes that can be exploited to protect domestic industries.

``But the general trend toward protectionism could undermine what has been the steady march of free trade during the era of globalization, with export-dependent countries such as China standing to lose the most."

So the unintended consequences of bailouts are partially contributing to such movement.

Next, we have national governments falling under the weight of the financial crisis.

Belgium is reportedly the first of the victim.

This according to the Financial Times, ``The Belgian government last night became the first national administration to fall as a direct result of events linked to the global financial crisis.

``Belgium's King Albert II formally accepted the resignation of the coalition government led by Yves Leterme, prime minister - but ordered it to stay on in a caretaker capacity to deal with "day-to-day" business.

The political ramifications of the crisis carries a big weight to trade, migration and capital flows dynamics, hence requires to be monitored.

For us, protectionism is one major threat or risk that can bring about the modern day version of the Great Depression.