Slamming the door on trade

The Washington Consensus may be dead, but its legacy of free trade is alive; albeit gasping for breath. In the wake of the economic crisis, governments around the world are contradicting themselves as they propose squarely protectionist measures, while at the same time singing the praises of free trade.

Whatever the global leaders' rationale, the world we live in today is built on liberalised trade. Starting from the launch of the General Agreement on Tariffs and Trade (Gatt) in 1947, global trade flows have increased to $28.2 trillion in 2007 from just $120 billion in 1948. That growth would not have been possible without the half century of work to reduce trade barriers from Gatt, and efforts by the World Trade Organisation.

A new wave of protectionism could effectively put an end to the globalised world as we know it. This end would be coupled with numerous negative implications for the companies and banks that have built their success on the growth of world trade. "Trade has become another casualty of the recession," says Pascal Lamy, WTO director-general. "In these times of serious economic crisis, our biggest challenge today is to ensure trade is part of the solution and not part of the problem."

Checkered history

The history of protectionism is varied. The Smoot-Hawley Tariff Act in the US, widely agreed to have caused a bad recession to turn into the Great Depression, is likely the darkest symbol of protectionism. The other is the astounding growth of countries that encouraged exports while protecting domestic industries, notably Japan and South Korea.