Memories of the Great Depression haunt current debates about the role of trade in a post-crisis world
Those interested in international trade politics these days might not expect the 1986 cult teenage comedy Ferris Bueller’s Day Off to contain any valuable lessons. There is, however, one scene from the film that stands out in this regard. Ferris skips school to hang out in downtown Chicago with his best friend and girlfriend, leaving behind a bored economics class forced to listen to their teacher’s drab monologue. The subject of the class is the Smoot-Hawley Tariff Act of 1930 which, so the teacher argues, exacerbated the Great Depression by significantly raising tariffs on US imports.
The film-makers’ intentions are clearly to bore us with a soporific lesson and subject matter, while contrasting this with the great time Ferris is going to be having in the city. But this is precisely the moral of the film for me as a political economist: the idea that trade has to be free at all costs lest we bring about economic collapse, mass unemployment and the rise of extremist politics is completely taken for granted, even though it rests on some pretty shaky analytical foundations. This serves to limit debate on the role trade policy can and should play during the current global economic crisis.
In this context, the ‘Smoot-Hawley Myth’, as I call it, has been seized upon most keenly by global policy elites, anxious to preserve the current liberal trading system by invoking the spectre of the Great Depression. At the first G20 Leaders’ Summit in Washington in November 2008, the final communiqué stressed ‘the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty’. At the London meeting, moreover, there was agreement on ‘not repeat[ing] the historic mistakes of protectionism’. Pascal Lamy, the Secretary-General of the World Trade Organization (WTO), meanwhile, has repeatedly stressed how ‘Smoot-Hawley touched off a domino effect of retaliation and counter-retaliation among trading partners which provoked a severe contraction of international trade, depressed growth and rising unemployment around the industrial world’.
What is most problematic about this ‘myth’ is that it rests on a highly contestable reading of economic history. As Susan Strange argued back in 1985, at the time of another major global recession, the Smoot-Hawley myth is not confirmed in the account of the Great Depression offered by respected economic historians such as Charles Kindleberger and Arthur Lewis. According to them, Smoot-Hawley only had a ‘minimal’ effect on world trade and was more a symptom of the global depression than its cause. This is corroborated by more recent economic histories of the Depression. These not only find that the tariff had a small effect on world trade volumes, but also argue that the measure was mainly aimed at stabilising financial markets by protecting the US balance of payments position.
Despite its dubious historical validity, the effects of the Smoot-Hawley myth are nevertheless still keenly felt in the global trading system where, despite having the leeway to raise tariffs and introduce other trade barriers, countries have generally refrained from doing so. The G20 countries, for example, have committed to not implement new measures (the ‘standstill’ pledge) and to ‘rollback’ any measures that are introduced. This is, of course, not to say that ‘beggar-thy-neighbour’ protectionism is desirable or that states should completely close themselves off, but rather that in the current climate any deviation from previous commitments to liberalisation is harshly and too quickly condemned (as has happened in the case of Argentina).
The influence of such ideas is also reflected in the exaggerated view of ‘crisis protectionism’ held by many mainstream economists and commentators. In one of its latest Leaders, The Economist writes of a ‘gated globe’, where ‘the trend to greater openness has been replaced by an enthusiasm for building barriers’. The Global Trade Alert website, set up and featuring contributions from leading trade economists, continues the charge by counting the number of trade restrictions implemented since late 2008 (which is likely to overstate the incidence of trade barriers) and publishing doom-laden reports with titles such as The Unrelenting Pressure of Protectionism.
Yet, since the crisis, the fact is that the cumulative percentage of restrictions implemented by the leading twenty economies has only covered 3.6% of world merchandise imports, not entirely deserving of the alarmist rhetoric!
The skewed ‘memory’ of the Great Depression also highlights the problems of the current global trading system. Its main institution, the WTO, is often seen to privilege the interests of developed economies in selective trade opening, to be undertaken through successive multilateral trade negotiating rounds. From this perspective, the failure to conclude the current Doha Round reflects the increasing frustration of developing countries (especially emerging economies) with the model of trade liberalisation associated with the WTO. The prevalence of the Smoot-Hawley myth, which has been invoked to justify a rapid conclusion of the Doha Round in order to guard against protectionist ‘threats’, hardly helps to allay such fears. Instead, it limits the debate on possible policy options in response to the crisis by reinforcing the contested mantra that free trade always offers the best prospects for economic development and prosperity.
A growing number of critical trade scholars (including Rorden Wilkinson, Silke Trommer James Scott, Erin Hannah) have begun to challenge ‘expert knowledge’ on global trade and its potential to stymie attempts at reform of the existing system. They argue, in effect, that we should not take much of the received ‘economic wisdom’ (and its implicit threat discourse) at face value. Not entirely unlike Ferris Bueller, who in his own way chose to defy the system, we should be looking to challenge the way the global trading system is talked about. Only then will we be able to envisage alternatives.