Trade War on the Horizon?

Trade War Looming

If Obama follows his protectionist impulses, he will destroy the world economy.

During the American primary campaign, Obama wanted to re-negotiate NAFTA, stop new free trade agreements, his rhetoric was protectionist. After he secured the nomination, Obama was not dependent on the unions and the left and toned this down. The selection of centrist free-trade advocates in important positions indicated that he had only played a tactical game in the election.

But the massive stimulus package that Congress is debating has sounded the alarm with American trade partners. A large majority in Congress wants this injection of money to be exclusive to American companies. No projects using foreign iron and steel will get financing, and in the Senate lye a proposal that will dramatically expand this Buy American-proposal dramatically.

It is exactly this, to favor one’s own producers, always tempting in a recession, that could spark a trade war. The EU commissioner for trade has already threatened to take counter-measures, while France is embracing protectionism. China, Brazil, Canada and many others have warned against the Buy American proposal.

Economists largely agree that the rise in trade barriers after 1929 – the Smoot-Hawley Act- was a major factor to the depression getting to be so deep, long and global.

Roosevelt’s Republican predecessor, Herbert Hoover, passed the Buy American Act, which meant that the federal government could only buy from American suppliers. Today it is the Democrats that who walking in Hoover’s footprints. Obama must use his weight to stop this, but it could be hard even if he wanted. You will reap what you sow. For now, Obama has signaled that he will “look into” the matter.

Globalization has been a success without equal in history for the last few decades. For the first time, we have seen a rapid global decline in the number of poor people and the portion of poor people is almost half since 1981. That happens in step with, and is largely the cause of, a powerful rise in world trade driven by trade liberalization and technological changes.

The fact that mistakes have been made in the regulation of the finance markets and macro economic policy must not be mixed with a largely successful deregulation of international trade and streams of investment. If Obama or any other major actors are drawing the wrong conclusions here, it will hurt us all, but mostly small countries like Norway who are especially dependent on foreign trade.

Unfortunately, Norway has little moral authority when we are warning against a trade war since we, under different governments, have done our best to sabotage the WTO-process by insisting on unreasonable high protection of our own agricultural sector.