GHEI: The free trade lesson

Avoiding protectionism and interventionism is key to ending global malaise

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The world learned at least one lesson from the Great Depression. Despite today’s economic gloom which has spread from the United States to Europe and now Asia, no major player has moved to introduce protectionist policies or impose capital controls on a large scale.

That’s a good thing, considering the trade war sparked by the infamous Smoot-Hawley Act of 1930. This measure raised U.S. tariffs on 20,000 goods to record levels and triggered retaliatory tariffs by our trading partners. Countries also imposed nontariff barriers, like quotas, to keep imports out. The net result was that the Great Depression was prolonged and intensified as nations closed their borders, shrinking international trade by a third between 1929 and 1932.

We have not seen anything like that during this Great Recession. The General Agreement on Tariffs and Trade (GATT) ratified in 1947 has been modified in several rounds of the ensuing years with countries steadily agreeing to open their markets further each time. The Uruguay Round of trade talks in 1986-94 ended with the creation of the World Trade Organization, although the current Doha Round has been at a standstill for a long time.

Instead of backsliding into protectionism with the dual hits of a global slowdown and multilateral negotiations stalled, what we see is countries seeking to conclude regional free-trading arrangements (FTAs). India and Japan signed a FTA in February of this year. The European Union signed one with South Korea in July. The EU and India are negotiating an agreement now.

The United States ought to be the world’s free-trade leader, but we’re not. The U.S government is the holdout as three FTAs with South Korea, Panama and Colombia are left pending, even though fast-track authority allows a straight up or down vote in Congress. While FTAs wouldn’t be a panacea to our economic woes, they would certainly help create desperately needed jobs and send the signal that Congress and the president are serious about dealing with the nation’s fiscal problems.

China remains the one large country that is reluctant to play by the rules. The People’s Republic, one of the most protectionist nations on earth, needs to open its markets to more imports. It also needs to loosen significant controls on its currency. The global marketplace and the Chinese economy would benefit if Beijing moved to a less interventionist policy and allowed the yuan to float freely. This would alleviate some angst about the Chinese accumulating vast reserves of dollars - largely in the form of U.S. Treasuries.

The Chinese economy, though still growing at a robust pace, has slowed for two successive quarters. The economic news from much of Asia is even worse. For example, the Japanese economy, in the wake of the devastating tsunami, continues to contract, shrinking by 0.3 percent in the second quarter of 2011.

The best thing Washington could do to foster stability in an uncertain time is reassert the U.S. role on the world stage. When it returns from recess, Congress should pass the FTAs so trade can help spur world economic growth.

Nita Ghei is a contributing Opinion writer for The Washington Times.

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