Thursday, February 5, 2009

Economic Nationalism

When recession approaches, the first casualty is often a feeling of international solidarity, and belief in free trade. A recession tends to create an attitude of 'let's batten down the hatches and look after ourselves.'

One of the great mistakes of the Great depression was a rise in protectionist feeling (e.g. the Smoot Hawley tariff act) which led to a sharp reduction in international trade. This made the global recession worse. Some industries may have benefited temporarily from a reduction in international competition. But, other industries suffered from the retaliatory tariff rises. Consumers paid higher prices and bought even less.

If free trade is beneficial in good economic times does it become damaging in a recession?

The problem is often one of perception.

An industry is struggling because of the global downturn. Unions and industry bosses look for causes and see cheaper imports as one reason. If people stopped buying imports, the domestic industry would survive and jobs protected.

Therefore there becomes a powerful political pressure for import tariffs to protect domestic jobs. When unemployment is rising remorselessly towards 3 million, the threat of more job losses becomes a powerful argument.

The problem is that protectionist policies hurt the wider economy.
  1. Firstly consumers are worse off because they pay more for imports leaving lower disposable income and lower consumer spending.
  2. Secondly, other industries will suffer when countries retaliate by placing tariffs on our exports.
  3. Thirdly, raising tariffs on imports may not not protect the declining domestic industries anyway.
  • The costs of allowing cheap imports are easy to see - Domestic unemployment.
  • The benefits of free trade are more spread out throughout the economy and people often don't make the connecting link between reducing imports and the future reduction in our domestic exports.

Foreign Workers

In a boom, certain sectors become short of labour, this encourages immigration to fill the gaps. When the economy is at full employment, no one minds that foreigners may be working, especially in non desirable jobs. But, when the economy goes into recession and unemployment rises, the fight for jobs becomes intense and people start to ask why should foreigners take our jobs when domestic people are unemployed?

It's a difficult one.

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