Protectionism risks big, but odds may be low

By Doug Palmer - Analysis

WASHINGTON (Reuters) - Hard lessons from the Great Depression make it unlikely that countries will shut down trade to save jobs if the global financial crisis turns into an ugly worldwide recession, but trade liberalization could slow, analysts say.

U.S. Commerce Secretary Carlos Gutierrez, in a speech on Wednesday, became the latest Bush administration official to warn of the damage that new trade barriers could cause.

Less than one year after the 1929 U.S. stock market crash, Congress passed the now-infamous Smoot-Hawley Tariff Act that raised tariffs on more than 20,000 imported goods.

"Essentially the idea was in a time of economic turmoil we needed to protect U.S. jobs," Gutierrez said to the U.S.-India Business Council.

"We did reduce imports by 50 percent, but the rest of the world ... retaliated in kind and our exports dropped 50 percent. Our unemployment went to 25 percent. If there's one big lesson that we should learn from that it's protectionism doesn't protect," Gutierrez said.

Most economists agree that hiking tariffs would be the one of the worst things to do to try to restore economic health, and so far there are few signs so far that countries are seriously contemplating that step.

"At the moment, the chances of a big protectionist outbreak seem a bit remote," said Edward Gresser, trade studies director at the Progressive Policy Institute.

The next U.S. president, be it Democrat Barack Obama or Republican John McCain, will need to work closely with other countries "to get over this crisis and it will be hard to do that if we have a big trade fight with them," Gresser said.

That so much of international trade is between companies also reduces the chance that countries will hike tariffs, said Claude Barfield, a resident scholar with the American Enterprise Institute.

"We'll just have to wait and see. When Asia went through a financial crisis in the late 1990s, we didn't see an uptick in protectionism," Barfield said.

FREE TRADE DOUBTS

Stuart Eizenstat, who served as deputy Treasury secretary under former President Bill Clinton, said he does not believe the United States would enact protectionist legislation under either an Obama or a McCain administration.

But the crisis could prompt many countries to increasingly question longtime U.S. assumptions about the benefits of open trade and investment, he said.

"I think it can have a very profound impact on our capacity to get things done. And if it leads to a wave of protectionism and raising barriers to trade and investment, it will complicate the ability of the world to pull itself out of what is clearly a global slowdown coming," Eizenstat said.

The crisis also could further delay completion of the nearly seven-year-old Doha round of world trade talks "even though one could argue the Doha round would inject $100 billion, without taxpayers money, into the world's economic system by lowering tariffs," Eizenstat said.