The trade wars of the Great Depression, which still give economists nightmares, are often held up as Exhibit A when trying to explain why reverting to nationalist commerce policies will not help during the ongoing economic downturn. "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," said World Bank chief Robert Zoellick recently.
So much so, that many experts feel next weeks Group of 20 (G20) meeting in London needs to be focused on fighting protectionism. They warn world leaders against getting distracted. "In the short term, they need to fight against unemployment, which is connected to trade and exports," said Heinz Hauser, an economist at St Gallen University in Switzerland.
"I think they should put more weight on fighting protectionist biases. Sustaining trade should be the immediate response to crisis." A recent World Bank report showed that 17 of the G20 members have reneged on their free-trade commitments at the last G20 meeting in Washington in November and have implemented trade barriers. So far, the 153 members of the World Trade Organisation (WTO) have mostly avoided overt protectionism.
However, there is the prominent exception of the auto industry bail-outs, which Hauser labelled as "anti-competitive." Countries have instead moved into murkier forms of protection. These do not necessarily violate WTO rules, but still contribute to further contractions in trade, which is already falling steeply, along with demand, as economies shrink.
"None of us are fooled" by these measures, said Simon Evenett, an economist and expert on trade, adding that he too was concerned protectionism was "falling down the ladder of priorities" for the G20. While they most likely will not be able to agree on the Doha Round of trade talks at next weeks summit, the leaders of the largest economies should at least make sure markets do not close up, Evenett said.
An example which has grabbed headlines is the brewing dispute between the United States and Mexico, after a pilot programme that allowed some truckers from the southern neighbour to cross the border was scrapped. Mexico reacted by enacting a slew of trade restrictions said to be equal in economic value- 2.4 billion dollars -to the damage caused by the United States. But not everyone thinks this is bad.
"We applaud what (the US) Congress did," said Lori Wallach from Global Trade Watch, a Washington-based consumer advocacy group. She said it was primarily an issue of safety and labour laws, as Mexico was more lax than the United States. Similarly, she feels countries have a right to use stimulus packages to boost local industries. "Congress can decide to spend domestic taxpayer money domestically," she said.
While US President Barack Obama has been vague on trade, he did get Congress to water down a Buy American provision contained in his administrations planned stimulus package. Bail-out plans also risk being protectionist, some say, if the government requires the handout to be spent domestically, forcing banks to forgo interests abroad. And though protectionism has been demonised, Amy Barry with the charity Oxfam said that it is a needed tool at times.
"I think protectionism, when it entrenches existing inequalities and promotes the interests of the already well-off, is a dirty word," she said. "However, there is definitely a time and place for protectionism," Barry quickly added, when it "serves to protect" the economically weak. The industrialised nations owe much of their wealth, she said, to protectionist measures they enacted in the past.
Developing nations want safeguard mechanisms to protect potentially exposed sectors, as part of any multilateral trade deal, in part to ensure liberalisation does not cause more harm than good and gives them time to alter their systems to cope with the changes. "Oxfam sees a huge potential to trade, but it cannot be done in a way that increases the vulnerability of the poorest countries," she said.