Few economists have a good word for the Smoot-Hawley tariffs of 1930, which provoked a worldwide round of competitive protectionism that reduced trade, deepened and prolonged the Great Depression, and aided the rise of the Nazi Party.
Out of that disaster came a bipartisan consensus: the U.S., for decades a protectionist country, needed to stand for free trade. Against considerable opposition at home and abroad, the U.S. led the charge for global openness after 1945.
At first, the struggle centered on tariffs and quotas. But the U.S. soon came to understand that governments intent on protecting domestic industries have less obvious, but no less effective, methods at their disposal. These ‘non-tariff barriers’ include ‘buy national’ provisions and government subsidies to domestic industries. Since the 1980s, the focus has shifted to these non-tariff barriers.
One of the worst things about the Bush/Obama auto bailout is that it’s blown a huge hole in the side of American leadership on free trade. The same is true of the ‘Buy American’ provisions in the stimulus package under consideration in the U.S. Senate. From now on, any country that wants to justify protecting its domestic industries against American exports needs only point at us.
That’s not a hypothetical danger. On Tuesday, Britain announced a 2.3 billion pound bailout of its own auto industry. As the BBC reported:
Many influential voices have called for the UK’s car industry to be given the same assistance as struggling US auto firms GM and Chrysler, which have received a government bailout.
Just like the U.S. bailout, the British one is being justified not only as a way to save jobs, but as a form of industrial policy:
The government’s plan has two aims: not just to keep the wheels of the car industry turning at a time of economic crisis, but also to direct carmakers towards producing more environment-friendly vehicles.
And the hits keep on coming: Germany is subsidizing consumers who trade in their old car for a new model. Now the U.S. is thinking of doing the same. There’s a phrase for this: competitive protectionism. It was a bad idea in 1930, and it’s a bad idea now.