Protectionism: Clear and Present Danger

In a crisis or a recession, populists demands from growing "nationalism" increases the odds for governments to embrace protectionist policies out of political exigency, regardless of the geopolitical or macroeconomic consequences.

And since the outbreak of the crisis, the world has gradually lurched towards this high risk direction led by the US.

This from the IMF's latest report Swimming against the tide How Developing Countries are coping with the Global Crisis,

``Protectionism remains a serious threat in the current environment. Many countries are contemplating, or have already implemented, increased protection, which may be difficult to reverse and will slow the recovery. Since the beginning of the financial crisis, roughly 78 trade measures have been proposed or implemented, of which 66 involved trade restrictions. Of these,47 measures were actually implemented, including by 17 of the G20. In addition, anti-dumping claims and actions increased 20 percent in 2008 relative to 2007; and 55 percent in the second half of 2008 relative to the first half of 2008. (italics mine)

``Agricultural subsidies, not counted in these numbers, have increased automatically with the recent fall in commodity prices. In addition to changes in tariffs, nontariff barriers, such as licensing requirements and tighter application of product standards, are also being introduced. Governments are also taking measures to support specific industries through potentially trade distorting measures, including by increasing subsidies as part of fiscal stimulus packages. While government financial support packages do not necessarily distort trade, public intervention targeted at specific export-oriented industries or competing import industries are akin to protectionism and run the risk of starting a subsidy race among nations. In addition, there is a risk that governments providing “bailouts” to domestic banks may exert pressure on those banks to use those resources within their countries rather than to provide trade finance that would go to foreign countries."

Unfortunately economic ignorance will only aggravate the situation. As Ludwig von Mises warned, ``People favor discrimination and privileges because they do not realize that they themselves are consumers and as such must foot the bill. In the case of protectionism, for example, they believe that only the foreigners against whom the import duties discriminate are hurt. It is true the foreigners are hurt, but not they alone: the consumers who must pay higher prices suffer with them."