Creeping Protectionism and Failing Economies in Eastern Europe

This past January as the world economy was rapidly unfurling, I visited Washington DC and met with nine economists over the span of two days. I had long discussions with conservative and liberal thinkers, and those in between. They were very generous with their time and patient with my questions.

We spent a lot of time going over comparisons between now and the 1930’s. Over and over, the economists told me the big fear was that nations would turn inward to try and protect themselves. That’s what happened in the 1930’s. Many economists argue that the Great Depression didn’t fully take hold until a year after the stock market crash of 1929 – that’s the year the “Smoot-Hawley Act,” or  the “Hawley-Smoot Act,” was passed and the U.S. put import tariffs on just about everything they could.  (The Economist magazine has a nice, short article about the effects of the Act and economic isolationist policies of that era.)

When I met with economist Barry Bosworth from the Brookings Institution, here’s what he said:

“The Biggest threat to the system (today): suppose everybody now tries to turn inward. If that takes the form of restrictions against others, another round of Smoot-Hawley tariffs, then I think the degree of integration of the global economy, this time, is so large, that it would be extremely difficult, it would just collapse in on itself.”

Shortly after my meetings  in Washington, Congress passed a massive $800 billion stimulus bill. Within that, there was a “Buy American” provision to protect American steel and iron.

Well, flash forward to today…  China is firing back, reverting to trade protectionism.

Economic blogs and business pages were abuzz with the news. Is this the beginning of a trade war and the 1930’s all over again? Are we watching the demise of world trade?

One of the economists I met with in Washington, Derek Scissors at the Heritage Foundation, says the latest news from China is overblown. He argues that China’s recent moves are neither new nor particularly important.

Beyond China, there’s other countries making news, and making it into the World’s Global Economy podcast… Countries like Latvia. One in three Latvians under the age of 25 can’t find work. “Who cares?” you might say. Not to be heartless, but how do Latvia’s problems impact the world economy?  If the Chinese economy putters, I get why that’s important. But Latvia? If Latvia were a U.S. state, it would be the 36th largest, just ahead of New Mexico. If Albuquerque has problems, in the grand scheme, most of us will still be OK.

But if Riga goes bust, we all should be worried. An interconnected global economy is a house of cards. And while Latvia is a small card, if you pull any one card out from the bottom…

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