Rising Protectionism Threatens World Trade -- And U.S. Jobs

Ever since Congress imposed a Buy American package as part of the stimulus plan, politicians and economists have been warning about the dangers of protectionism in a contracting world economy. We're now seeing the first indications that those fears may be well founded, with potentially serious consequences for the health of the U.S. economy.

Last month, for instance, the Chinese government rejected a $2.4 billion bid by Coca-Cola to buy Huiyuan, the top juice producer in the country. Beijing said the proposed deal could "narrow the room for survival" of small domestic drinks producers and cause consumer prices to go up. The Chinese said they were simply enforcing a new antitrust law, as Coke already owns 52.5 percent of the Chinese soft-drink market. But the failed deal was also the largest proposed acquisition of a Chinese company by a foreign firm.

Of course, the move might be simple payback for China's humiliation when Congress successfully blocked the Chinese oil company Cnooc from buying Unocal in 2005. Cnooc eventually withdrew its $18.5 billion bid after what China described as a "regrettable and unjustified" campaign to paint the deal as a national security threat.

Such tit-for-tat fights involving huge companies might seem far removed from the daily concerns of most people. It's exactly this cycle of new trade barriers and retaliation, though, that can fuel outright trade wars. And those, as the aftermath of the disastrous 1929 Smoot-Hawley tariff handily illustrates, can destroy jobs in export-oriented industries and elsewhere.

Protectionist impulses are clearly on the upswing. Last month, a World Bank report found that 17 of the world's 20 largest economies had adopted new trade restrictions since last November. "Economic isolationism can lead to a negative spiral of events such as those we saw in the 1930s, which made a bad situation much, much worse," World Bank chief Robert Zoellick warned in a statement.

To see how that works in practice, consider Mexico's recent imposition of $2.4 billion in tariffs on U.S. imports such as toilet paper and shampoo. The retaliatory move followed a Senate decision to end a NAFTA pilot program that had allowed some Mexican trucks onto U.S. highways. Now Mexican trucks will once again be forced to transfer cargo to U.S. vehicles at the border.

A number of European countries, including France and Spain, have announced subsidy packages for their ailing auto industries that restrict funding to support domestic jobs. The U.S. government has already provided $17.4 billion in assistance to Chrysler and General Motors and the companies have asked for more help. Meanwhile, Europeans accuse China of protectionism for banning imports of products ranging from Irish pork to Belgian chocolates.

A number of world leaders, including German Chancellor Angela Merkel, warn that protectionism is both dangerous and difficult to stop once it begins to spread. The world community needs to pay attention to the lessons of the 1930s, when protectionism added significantly to the global slowdown.

Container-ship image via Flickr user jdnx, CC 2.0