Trade Protectionism and Worldwide Economic Contraction by Rodrigue Tremblay

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Dandelion Salad

by Rodrigue Tremblay
May 28, 2009

“I almost went down on my knees to beg [President] Herbert Hoover to veto the asinine Hawley-Smoot Tariff.”…“That Act intensified nationalism all over the world.” — Thomas Lamont, banker and economic adviser, June 1930

“Now is a time where we have to be very careful about any signals of protectionism.” –President Barack Obama,  February 19, 2009

“From the purely economic point of view nothing speaks against free trade and everything against protectionism.” — Ludwig von Mises (1881-1973), Austrian economist

When the economy is booming, foreign borrowings and imports of goods and services from other countries are most welcome. They allow for more spending without inflation and they raise living standards. It is a version of having your cake and eating it too. In an economic downturn, however, the political reflex of populist politicians is to turn protectionist and to become economic isolationists by raising trade barriers. In such an environment, foreign competition becomes a convenient scapegoat for the crisis, even though the causes of such crisis are most often purely domestic in nature.

Regarding trade, the Obama administration seems to have adopted the “good cop, bad cop” routine, extolling the virtues of free trade in presidential speeches while letting Congress pass protectionist measures in series. The fear here is a repetition of the 1930s when American politicians rushed to pass the infamous Smoot-Hawley Tariff act of 1930 that triggered an international trade war and which accelerated the worldwide economic downturn. World trade plummeted into a spiral downward and domestic production for exports contracted everywhere. Normal trade links were disrupted and intricate inter-country production arrangements were dismantled.

Indeed, in a misguided attempt to fight the economic downturn, governments all over the world rushed to adopt self-destructive “beggar-thy-neighbor” policies, in a futile attempt to devalue each other’s currencies and to reduce their imports in retaliation, forgetting that one country’s imports are the other country’s exports. The consequence was that from 1929 to 1933, the value of world trade contracted by two-thirds, going from $5.3 billion to $1.8 billion.

The world economy went down with world trade and every country was worst off as a consequence. A severe recession was then turned into a worldwide economic depression. This is because trade protectionism in the modern world is the equivalent of “cutting off your nose to spite your face” and its main consequences are to spread poverty and economic dislocations.

Some seventy years later, the same mistakes risk being repeated. Most modern economies are interrelated and if politicians begin to unravel such an economic integration, the consequences may be even worst than in the 1930s, because economic integration is much more advanced and prevalent than it was then.

World trade is already contracting due to the current global financial crisis, a decline in commercial bank trade credits and a drop in private investments. According to the World Bank’s projections, total world trade in goods and services this year is expected to fall 6.1 percent. The decline will particularly hurt large export-led economies such as Mexico, Germany and Japan.

The issue of protectionism is also particularly important for Canada, the U.S.’s most important trade partner. The United States and Canada not only share this continent, but they also have a mutually beneficial trading relationship that has been enhanced with the signing of the Canada-U.S. Free Trade Agreement on October 12, 1987. This treaty was enlarged in 1994 to include Mexico with the implementation of the North American Free Trade Agreement (NAFTA). As a consequence, there are no tariffs on most goods that pass between Canada and the United States.

In 2008, Canada’s trade with the United States accounted for about 76 percent of its total international exports and 63 percent of its imports, while U.S. exports to Canada represented about 20 percent of total American exports. A lot of American jobs are tied to American exports to Canada. In fact, Canada is the leading export market for 36 of the 50 U.S. States and Canada is a larger market for U.S. goods than all 27 countries of the European Community combined.

Moreover, Canada is the single largest exporter of total petroleum to the United States, supplying the U.S. with more than 2.5 million barrels per day. What is more, this oil supply is guaranteed under Nafta. There is also an important and growing cross-border trade of electricity between Canada and the United States that links the two economies.

This does not mean, however, that trade frictions between Canada and the United States do not exist. Sometimes politicians behave as if the trade agreement between the two countries did not exist. A case in point is the routine inclusion of “buy American” provisions in spending bills voted by the U.S. Congress, which can be considered overt protectionist trade-distorting measures and contrary to the spirit and the letter of the free trade agreement.

If the lessons of the past have been learned, governments should resist the temptation to export their economic problems abroad and should work instead to stimulate their economies without resorting to protectionist measures. What is needed now is to avoid sending the world economy into a self-reinforcing contraction that would hurt everyone.

Rodrigue Tremblay is professor emeritus of economics at the University of Montreal and can be reached at:
He is the author of the book ‘The New American Empire’.
Visit his blog site at
Author’s Website:
Forthcoming book: “The Code for Global Ethics” at:
The French version of the book is now available.
or: Le code pour une éthique globale


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5 thoughts on “Trade Protectionism and Worldwide Economic Contraction by Rodrigue Tremblay

  1. This article is almost entirely made up of distortions and half-truths and its premise and conclusion is entirely bullcrap.

    First of all I will address the core viewpoint this guy is coming from and that’s the Austrian school of economics. This theory holds that any interference in a market will destroy the natural workings of that market for the worse.

    Of course its built on premises that the market itself is not created, that there should be no obligation to those that build the infrastructure in which the market exists and that labor (people) is a commodity. All of these premises are in my opinion faulty.

    For example, he lists a quote by the Austrian economist Ludwig von Mises (1881-1973):

    “From the purely economic point of view nothing speaks against free trade and everything against protectionism.”

    Just replace “purely economic point of view” with “profit”. In a capitalist system the difference between what a person pays a employee (capital) and the value of what the person produces (labor) is profit. Capitalism is a system that rewards capital, hence its name. Also in a purely economic view, the well being of people is irrelevant.

    The canard of the Smoot Hawley Tariff Act has been addressed over and over and yet apparently will never die. Smoot Hawley tariff effected 6% of imports to America that was signed 6 months before the stock market crash. The economic downturn in America started well before the Smoot Hawley act and it was meant to stop the already happening economic decline. What caused the overall economic downturn in the first place? Well, that was Austrian economics. More then a decade of hands off laissez faire capitalism more the wealth of the nation into the hands of the too few and when no one has any money to buy goods and services the system breaks down.

    To point at this astonishing lack of insight or just plain old lying, the author states that “The consequence was that from 1929 to 1933, the value of world trade contracted by two-thirds, going from $5.3 billion to $1.8 billion.” The stock market collapsed entirely in 1929, its so profoundly dishonest to say that was a result of ‘interference in the market’ when it was a direct result of Austrian school theory and the laissez faire economic theory that ran the country from right up to the collapse itself.

    The idealized purpose of trade is two people make a exchange and both feel they are benefiting from the transaction. Equally, when two countries trade, both people of that transaction should be benefiting from the transaction.

    Phil Knight (Nike) stopped making shoes in America and moved their production overseas because those people will work for less then American workers. It does not change the market value of shoes, because they are less expensive to make does not mean that he is going to sell the shoes for less because he knows the market value of the shoe is higher and he is trying to maximize profits. The people of the sweat shops don’t benefit because there are no worker safety regulations, a livable wage standard, the right to organize, environmental protections that put their health at risk. The American worker lost their job and further increases the unemployment rate which reduces all labors values. Both the American and foreign worker loses, but it does benefit the sweat shop owner who is rewarded for exploiting workers and Phil Knight can take the extra profit and become a billionaire.

    To insure that both people prosper from trade, which is the exact role of governments – to insure the people’s benefit – they need to require of our trading partners livable wages, safe working conditions, the right to organize, worker safety laws, environmental protections etc. while protecting American jobs either outright or through retraining programs. This requirement is enforced through the use of tariffs. Also remember that tariffs were the largest income of the federal government from 1890 to 1912 when the Federal Reserve Act was signed, and that act has dubious Constitutionality.

      • I’ll reword this comment a little to be more respectful and polite then email the professor with these issues I have with the article. If he does respond I will let you know.

        Perhaps after that I could ask the most basic question of all: when and where in the world has the laissez faire capitalist system ever achieved lasting success that did not end in great income disparity and collapse? To my knowledge, and I’ve searched for years, it never has. Its a completely theoretical model with all available evidence pointing to its invariable failure.

  2. not sure if the author actually read the buy American provisions. they actually are only giving lip service at best to try and encourage purchasing of American products with American tax dollars. they don’t preclude purchasing any body else’s. and the loop holes to do so are big enough to drive a battleship through, unlike other countries versions where the ‘loop holes’ would make it hard for a mosquito to crawl through

  3. I disagree witht he premise, as it pertains to the United States at this time.

    While other countries are not so fortunate, we are in that our manufacturing and raw materials capabilities are so great that a more insular economy would benefit us.

    I am sorry if people in China or India or the other Pacific Rim countries would suffer.. But that is the fault of their own governments for not having a SUSTAINABLE model… And sucking out the wealth of our middle class to their benefit is NOT so, because it has already reached a point of diminishing returns for all involved.

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