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Don't Buy American

Protectionism is the worst possible outcome

By Pierpaolo Barbieri, None

First it was a “credit crunch,” then it was an “economic crisis,” and now a “global economic downturn.” But, with Japan in recession, Europe in recession, and the U.S. in recession, it is high time we face our fears: We are living through a global recession. Still, the worst may be yet to come—if policymakers continue to push for short-sighted economic nationalism, they will make sure this becomes the worst bogeyman of them all: a global depression.

In the past weeks and months, governments around the world have been attempting to fight the economic crisis with monetary and fiscal measures. On the monetary side, even prudish authorities like the European Central Bank have joined the U.S. Federal Reserve and the Bank of England in slashing interest rates to create incentives for lending and borrowing. Amidst what started as a credit crunch, this was an essential step toward keeping economies afloat when trust suddenly evaporated not only for risky assets, but also for credit-worthy corporations.

On the fiscal side, most countries are rushing to pass stimulus bills to prevent the phantom of deflation from materializing itself: From developed countries like Germany to developing nations such as India and China, everyone seems to be doing it. By far the most publicized attempt has been President Obama’s euphemistically named American Recovery and Reinvestment Act, which flew through Congress a couple of weeks ago. But in measures like these hides perhaps the most pervasive economic threat to future global stability and prosperity: economic nationalism.

Sometimes these protectionist clauses are not included in the original bills sent by executives to a country’s legislatures—and yet they creep in, in the form of amendments and edits. In America, for instance, the incoming Obama administration was so keen on passing the ARRA around Valentine’s Day that the final version of the bill got passed in PDF format; not all legislators had a final version of the 700-page document they were passing, which, as it turns out, will help create a federal deficit this year that would be the world’s ninth largest GDP in the world if it were a country.

Perhaps this explains how the ARRA now includes a “Buy American” clause, which stipulates that all steel and manufactured goods produced with stimulus money will have to be made in America. The bill also makes it practically impossible for any company receiving federal funds to hire foreign labor, no matter how skilled.

But protectionism does not creep into measures to fight the global downturn only because of the haste with which they fly through legislatures. Even in the 21st century, there are people who actually believe that “Buy American” clauses are a worthy cause. When asked by the New York Times if people would oppose protectionism, Senator Sherrod Brown (D - Ohio) replied: “Who could be against it? Well, some Ivy League economists don’t like it—something about Smoot-Hawley and the Great Depression.”

With all due respect, the senator should know better. The Smoot-Hawley Tariff Act of 1930, perhaps the best-known protectionist law in history, erected tariff barriers for over 20,000 products after the Wall Street crash in 1929. It may have gotten the lawmakers that passed it reelected, given the short-term boost in domestic demand, but it was a cataclysmic event for the global economy in the medium and long run: Countries soon became entangled in a protectionist race and subsequent trade war that caused American foreign trade (imports and exports) to almost halve. According to Milton Friedman, it created a perfect storm that turned a severe contraction into a depression of global proportions that only ended through world war.

And, as it turns out, America is not the only country turning to protectionist barriers. In a similar vein, French policymakers have included protectionist measures in their stimulus bill, though European Union complaints have made them temper their proposals. Furthermore, for all his talk of avoiding economic nationalism in his speech to the U.S. Congress on Wednesday, British Prime Minister Gordon Brown has called for “British jobs for British workers.” Though the rhetoric of short-term political gain is attractive, it is definitely detrimental for everyone playing the game. Economic nationalism gives rise to a prisoner’s dilemma in which the worst possible outcome prevails. If the 1930s are any sign, this short-sighted approach leads directly to further contraction of economic activity. And we know what that is called.

A global depression is not only terrible for its economic consequences—which are pretty bad indeed—but also for its socio-political effects. When poverty, unemployment, and hunger morph into fear, nationalism, and ethnic conflict, much more than our global financial system will be tested. Through protectionism, a matter of butter can quite easily become one of guns.

Pierpaolo Barbieri ’09, a former Crimson associate editorial chair, is a history concentrator in Eliot House. His column appears on alternate Fridays.

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