There's been a lot of crowing in Washington these past few days. As the US, and the rest of the world, try to navigate through our current financial crisis and recession, governments are increasingly turning to fiscal stimulus packages in attempts to boost domestic economies.
The idea is simple enough. Fiscal stimulus is basically a fancy way of saying that the government will borrow money, either from its citizens or other countries by issuing bonds, to spend on infrastructure renewal, industrial development, or even tax cuts for corporations and citizens. It's difficult for even the world's best economists to really determine how effective such programs are in the long term but as unemployment continues to rise around the world, policymakers are beginning to wonder whether they have any other options.
Within the US stimulus package, much has been made of a provision called "Buy America" which would force infrastructure projects to use steel, and certain other commodities, that were manufactured in America as opposed to developing countries, such as China. The rationale behind the idea is that it keeps Americans employed. Critics, and there are more than a few, label it protectionism and use history as an example to remind people of its dangers.
It was exactly this type of protectionist tariff, or a tax measure, that caused international trade to collapse and fueled the growth of a bad recession into the Great Depression in the 1930s. Though the measures being debated now are much less extensive, there is reason for alarm as this type of legislation disproportionately harms the developing world.
Trade is vital to the growth of any developing nation. Domestic markets are important to ensuring the quality of a country's products, but it is by exporting to international markets that developing countries can truly establish high growth rates and expand prosperity. Fair and equal access to foreign markets is vital to development.
What is most perplexing is that the countries set to employ protectionist measures are mostly large, industrialized Western economies. Many economists have noted that, though tariffs have played a vital role in economic development, the benefits starkly drop as an economy becomes more complex. If anyone should be directing industrial policy inward, it is developing countries, but most, if not all, lack the power to do so.
Thus protectionism reveals itself as a double edged sword for developing countries. Its use abroad limits the ability to grow exports and achieve growth and its use at home, which may very well be required during certain periods, undoubtedly leads to international condemnation and retaliatory measures. The trick then becomes navigating international political circles to keep everyone happy...a difficult task to say the least.