Towards another Great Depression?

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

Despite the parallels often drawn between the Great Depression and the current financial crisis, today’s WTO commitments guarantee that protectionist reactions are very unlikely to reach the scale that caused the collapse of international trade in the 1930s, argues Katinka Barysch, deputy director of the Centre for European Reform (CER).

Posting on the CER blog on 15 October, Barysch points out that while the crisis will undoubtedly give rise to protectionist reflexes, the West’s room for manoeuvre is limited unless they are “prepared to tear up the rulebook of the World Trade Organisation”. 

Citing Economist Intelligence Unit predictions of below-average world trade growth figures next year, Barysch acknowledges that decreased domestic demand, difficulties companies face in getting credit to finance imports and exports and high energy prices will inevitably affect trade flows. Nevertheless, the current crisis is not comparable to the Great Depression, which saw international trade contract by 14%, she counters.

Recession and rising unemployment will diminish people’s enthusiasm for free trade, but overall Europeans are still optimistic about its benefits, Barysch says, drawing on recent surveys. Furthermore, intra-EU trade, which for most European countries is the most important form of international trade, is governed by strict Community rules. Only if the economic downturn should turn “truly catastrophic” might trade barriers re-appear within the EU, she thus argues.

Similarly, the EU operates with limited autonomy when it comes to trading with the outside world. In the post-Great Depression period, eight rounds of multilateral trade negotiations have led to low tariffs on manufacturing imports and to strict rules on the use of “safeguard” measures as well as anti-dumping and anti-subsidy duties, Barysch continues. As a consequence, should the EU seek to bypass the rules, it would only have a marginal effect, she argues.

Even the failure of the Doha Round should not have a major impact on trade regimes in developed countries, she contends. But this is not the case in developing countries, which are applying tariffs much lower than those they signed up to in previous trade negotiations. 

“Countries such as Mexico, India, South Africa or Korea could ramp up their tariff protection without breaching WTO rules. European politicians, and the Commission, could then come under pressure to retaliate,” Barysch warns, adding that a Democrat-governed US Congress could turn more “hawkish” on international trade.

The real risk, then, is not that countries will seek to shirk their WTO commitments but that a hostile political climate will exhaust the opportunities to cooperate in areas such as climate change, she concludes. 

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