As global trade plunges, nations urged to resist protectionism

One of the world's leading economic advisory organizations is urging governments to avoid protectionism as they grapple with the global recession.

The Organization for Economic Cooperation and Development (OECD), advisor to 27 high-income countries, announced Tuesday it now expects global trade to decline as much as 13 percent in 2009, but reiterated its call that governments should keep markets open in order to allow economies to reap the benefits of the global recovery when it occurs.

Ken Ash, OECD director for trade and agriculture, said actions to discriminate against foreign goods, services, firms, or workers "could have a devastating effect in terms of prolonging and deepening the recession."

In a tighter trade environment, one in which home countries establish tariffs or otherwise create barriers to trade, consumers, the OECD said, would be hurt by higher prices, domestic industries would face higher costs, and exporters would be hit with a double-whammy: higher costs and retaliation from other countries. One major macroeconomic consequence from the above is higher job losses than would otherwise occur.

J. B. Penn, chief economist for Deere (DE), said governments should resist the temptation to interfere in agriculture conditions determined by the free market, as the interventions have been counterproductive, historically.

"We should avoid market interference in the consumption sector -- food price controls, export taxes, export embargoes -- and avoid government intervention and market distortions in the production sector," Penn told Reuters. "History is replete with lessons, especially in the food and ag sector, where the distortions caused by government interventions actually reduce, rather than improve, food security."

Protectionism worsened 1930s Great Depression

Economists, for the most part, oppose protectionist measures, despite their short-term benefits. During recessions and other periods of job losses, national governments frequently feel pressure from voters/domestic constituencies to increase tariffs and otherwise ban imported goods and services as a way to protect domestic jobs and industries. However, economists point out that protectionist measures, while creating a short-term fix, often result in the net-loss of even more jobs, as rival countries retaliate, which leads to an even larger decline in international trade, worsening economic conditions.

The free trade economists' strongest case study? The 1930s. These economists are quick to point out that protectionist measures implemented by nations during the 1930s to protect domestic jobs at the onset of the Great Depression in fact decreased trade further, deepening and lengthening the depression, resulting in the loss of many more jobs than the protectionist measures saved.

Need for social safety net noted

However, while underscoring the positive correlation between free trade and both GDP growth and job creation, the OECD was careful to point out that open markets, in and of themselves, are not sufficient to guarantee constructive outcomes. Trade policies must include other policies if trade's potential benefits are to be realized and the negative impacts of liberalization on vulnerable individuals and sectors are to be addressed, the OECD said.

"Today, in particular, effective labor market policies need to be in place to assist those that need to adjust," Ash said.

Economic Analysis: In this report, the OECD took a more-balanced approach to trade policy, while still underscoring the many benefits of free markets. Free trade faces its biggest challenge today since, perhaps, the 1930s. Both developed and developing world nations have lost millions of jobs due to the recession, and in particular developed economies are seeing job losses that are not likely to reappear in several sectors, due to job flight to lower-cost markets. As the OECD outlined, that speaks to the need to have extensive job retraining and education programs in place to prepare citizens for careers in new fields and sectors. It also highlights the need for an adequate social safety net by nations to deal with the large job dislocations stemming from both free trade (called "liberalism" in economists' circles) and the recession.

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