Beggar Thy Neighbor Rhetoric Leads to Protectionism
Posted by Michael A. Kamperman on May 4, 2009
Many economists attribute a worsening of the economic downturn in the 1930’s to “beggar thy neighbor” protectionists policies that stymied world trade. As economies contract and the political pressure increases on national politicians all over the world it is to be expected that efforts to keep jobs at home will hold sway. Today President Obama sought to increase taxes from foreign operations of U.S. corporations under the guise of protecting U.S. jobs. It won’t be long before such rhetoric requires even more action. “It’s a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y.,” President Obama said today. The message out of Washington is increasingly “buy American” and “keep the jobs at home.” Other countries such as Japan are paying for immigrant workers to be shipped back home. As the economic downturn worsens historical lessons will not stop world leaders from protecting the home turf first.
The U.S. suffered the most from protectionist impulses in the 1930’s. The U.S. was a creditor nation and ran large trade surpluses in the 1920’s that carried over into the 1930’s. However, today the U.S. is a debtor nation and runs far and away the largest trade deficits in the world. This means that if global trade contracts due to protectionism, the U.S. will not suffer nearly as much as those countries running large trade surpluses. Enhanced global trade makes the global economic pie bigger. But, if a country runs protectionist policies that country may stand to benefit at the expense of other countries. However, if all countries run protectionist policies it becomes worse for everyone. As economies continue to suffer it is almost impossible for politicians to resist protectionist policies that create and protect more jobs at home rather than abroad. Like the U.S. in the 1930’s, the countries that stand to suffer the most are those that run the largest trade deficits.
Today no country has larger trade surpluses than China. It only stands to reason that if global trade contracts China will be impacted the most. Ironically many countries are looking to China to spur global economic growth at the same time they are giving in to protectionist policies at home. The protectionist genie is already out of the bottle. If the U.S. government doesn’t quickly get in front of the curve a 1930’s rise in protectionism shrinking the world economic pie seems inevitable.
