The Tragedy of Protectionism

Dr. Hosty, my high school English literature teacher, once said that he had seen Othello on the stage many times but had no intention to see the play performed again. It is too depressing. One can see the cogs turning in Othello’s mind that lead inevitably to the deadly conclusion of the play. Such is the nature of tragedy.

In the aftermath of the 1929 crash, there was the Smooth-Hawley Tariff Act. This raised import duty on thousands of products — bare-faced protectionism. The international response, predictably enough, was retaliatory trade tariffs against the USA. This increased the length and misery of the Great Depression.

Iceland’s banks are collapsing and British savers’ money is at risk. The list of councils with money at risk is long. Gordon Brown is threatening to use anti-terrorism legislation to freeze Icelandic assets in Britain in order to recover the money.

In the current credit crisis, I believe that we are seeing protectionism of a different, less explicit kind. Protectionism drives away foreign investment because it’s less attractive to run a company in a country where one is forced to buy goods and services locally rather than buying the globally optimal ones (which may be the local ones).

There can be few deterrents more certain against foreign investment than the threat of government expropriation of foreign assets. Iceland has invested heavily in the UK. Will Gordon Brown’s actions drive further investment away? We shall see.

The reason that I refer to this as a tragedy is that it appears that Gordon Brown does not have much choice in the matter. He has to try to protect the deposits of British savers and councils; one cannot simply roll over for that amount of cash. However, the money lost may be dwarfed by the repercussions.

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