lifestyle leader

The interwar period is a fascinating "topic" in IPE. Scholarship on the period is vast, offering multiple explanations for the trends, events and ideas that contributed to the Great Depression and WWII. Some of the great thinkers in IPE (such as Kindleberger, Eichengreen and some guy named Bernanke) have contributed to the analysis of the period.

The interwar period is studied so closely because it provides lessons on how NOT to respond to economic contraction and financial crisis. If this history is any indication, protectionism should be avoided like the plague. The Smoot-Hawley tariff set off a change reaction of protectionism from 1930 on that plunged the world much deeper into depression. While a global (meaning British and American) consensus on trade was unattainable immediately following the war (see ITO failure), the GATT succeeded largely due to the Anglo-American recognition that tariffs were dangerous to economic recovery, prosperity and peace itself.

Over the next few weeks, the Obama transition team and US Congress would do well to brush up on their interwar history. The US steel industry, after years of benefiting from illegal subsidies, are reportedly lobbying in favor of a massive public works plan that would have a "buy US" provision inserted into every project. This would conceivably require the recipients of federal funds for public works and infrastructure projects to purchase US steel.

The proposal is troubling on a number of levels. For one, it would prove that the TARP was but the tip of an iceberg of government subsidy. Banks, autos, steel...where does it end? Second, it underlines the risks posed by the DDA's failure. WTO and G20 indecision in the face of rising protectionism risks exactly the domino effect that Smoot-Hawley accelerated nearly 80 years ago. Finally, a "buy US" clause would be a dangerous precedent for the President-elect to set. Many are already skeptical of his commitment to a liberal trading system, and early support for such backdoor protectionism would do little to burnish his trade credentials internationally.

Vice-President elect Biden believes that to be credible and effective, the Economic Recovery Plan must be "pork-free". It is equally important that it avoid the kind of backdoor protectionism the US steel industry is lobbying for.