In the face of efforts to save jobs by restricting imports and encouraging exports, policy makers have been uniting against protectionism. According to politicians, such moves carry the risk of other countries adopting an ‘eye for an eye' policy, and could end up seriously harming global trade.
The European Union was at the forefront of lobbying efforts against the ‘Buy American' clause in the US economic stimulus package. President Barack Obama's plan originally contained a clause requiring any publicly-funded projects to use US steel. The EU ambassador to Washington, John Bruton, said the measure would be seen as a new age of protectionism.
In addition, Brazil is considering appealing to the World Trade Organization to challenge the ‘Buy American' clause (watered down from the original proposal) in the US' economic stimulus package. The package stipulates that public works and building projects funded by the plan may only use US-made goods, including iron and steel.
Brazil claims that the ‘Buy American' clause means protectionism, which in turn would be counterproductive in tackling the worldwide economic downturn. The Brazilian government is expecting official support from the WTO on the issue.
Meanwhile, the Chinese Government has also warned that protectionist measures in economic stimulus packages from other countries will make the bad financial situation even worse.
The US stimulus package, worth 787 billion dollars, which was approved by Congress and was signed by Obama, has also been criticized by US business groups, warning that the Congress' ‘Buy American' clause would invite other countries to keep American goods out of their stimulus plans.
The historical example of the damage to which protectionism can lead is the Great Depression of 1930s. In 1930, the US raised tariffs and import duties on hundreds of products. The legislation, known as the Smooth-Hawley Tariff Act, made foreign merchandise expensive, with Americans encouraged to buy US-made products instead.
However, other countries responded to the US move in 1930 with similar measures to protect their own production. By 1932, US imports from Europe and European imports from the US fell by around one third of their 1929 levels. Furthermore, global trade fell by 66 percent from 1929 to 1934. Contrary to expectations, the unemployment rate in the US rose to 16.3 percent in 1930 and 25.1 percent in 1933, from 7.8 percent in 1930.
According to many economists, the rising unemployment rate and disappointment in trade affairs caused the rise of extremist governments such as the Nazis in Germany and the military regime in Japan. Therefore, such economists would say, the protectionist rise in tariffs led to World War II. At the end of the war, policy makers cooperated to create international institutions to prevent a repeat of the protectionist policies of the 1930s. The IMF, World Bank and the United Nations were founded in this context.