Risks to Trade

There is some speculation/debate making the rounds about whether the types of beggar-thy-neighbour policies that made the Great Depression worse (Smoot-Hawley) will start to appear now, making our economic outlook all-the-more dire.

Barry Eichengreen, for one, is relatively optimistic (in Should we fear a trade backlash?) that U.S. policymakers have enough other policy options available to them that they won't resort to protectionism.

But I have (at least) two issues with this view:

1) its not a question of IF these types of protectionist policies will appear, because they've already started; thus its a question of how bad it might get, as countries start to compete in a protectionist race to the bottom.

and

2) even if government-orchestrated protectionist policies don't escalate, it is quite possible that we are already seeing the functional equivalent of a shut-down to trade due to the credit crunch.

Regarding (1): In his post Welcome to hell of protectionism in 2009, Rybinski (hat tip, Mark Thoma) has a very cool spiderweb chart, originally from the St. Louis Fed, on the implosion of trade from 1929 to 1932. He then discusses the signs that its starting to happen again, principally in Asia. China, in particular, has seemingly re-pegged the yuan (as opposed to allowing it to continue its modest but steady appreciation; will devaluation be next?), and have been offering tax rebates and subsidies to exporters. Meanwhile Indonesia is actively trying to reduce imports. This may be limited in scope so far, but that's how it starts. And given the earlier pressure from U.S. politicians on China to allow its currency to appreciate when things weren't yet all that bad in the U.S., consider what the U.S. political reaction will be to recent Chinese moves in the face of huge American job losses. And, really, is a government aid package to save U.S. automakers all that different? Clearly, there will be plenty of pressure on politicians around the world to do whatever it takes to protect jobs and incomes at home.

Furthermore, regarding (2), even without a flurry of protectionism yet, as Menzie Chin notes at Econbrowser in "Trade finance is collapsing" the reluctance to accept letters of credit has contributed to a significant slowdown in trade, as demonstrated by the 90%+ fall of the Baltic Dry Index. Yves Smith was noting this back in November (Trade woes continue, tight credit a major culprit; and Trade, letter of credit woes finally go mainstream) and December (Groundwork for trade conflict being laid?)