If the G-20 leaders really want to demonstrate commitment to action on climate change, they would do well to be more careful about sticking to their commitments when it comes to open international trade.

Many lofty sentiments were displayed at both events. UN Secretary General Ban Ki-Moon announced that the world is "one step closer" to a climate change deal. But he declined, of course, to point out that this particular journey of a thousand miles looks increasingly precarious and that one step is nowhere near enough progress for those hoping for a final deal in December.

The new Japanese Prime Minister made nice with his colleagues by reaffirming his vow to reduce his country's emissions to 25% below 1990 levels by 2020. China's President Hu Jintao only went so far as to promise his country would reduce emissions by a "notable" margin, but at least sounded receptive to emissions reduction efforts. President Obama gave yet another eloquent speech, which though short on specifics, conveyed that the United States accepted responsibility for past damage, while continuing to insist on efforts from "rapidly-growing developing nations."

On trade, the G-20 will no doubt pledge to work hard to complete the Doha round of multilateral trade negotiations by 2010, and to keep trade open in the meantime. Unfortunately,its record in this area is not great.

The governing body has consistently, if hypocritically in view of its subsequent actions, issued statements emphasizing the importance of avoiding protectionism amid a global financial crisis, only to have its members do the opposite. Too often the temptation among G-20 countries to subsidize and protect their own has proven too great to resist.

The political tension between protection-seeking domestic constituencies and those in favor of more open trade is beginning to appear in the climate change debate. Importantly, the free flow of goods and environmental soundness are not necessarily at odds.

Indeed, because trade leads to wealth, and wealth to an increased desire and ability to protect the environment, the two are complementary. Nonetheless, many G-20 leaders are doing their best to set them up as being inalterably opposed. President Sarkozy earlier this month became the latest politician to call for carbon tariffs to "level the playing field" for French products that will attract a carbon tax and yet compete with untaxed imports.

Similar sentiments are held among certain U.S. politicians too. Senators from manufacturing states crucial to securing passage of a climate bill have repeatedly insisted that their support depends on protection for vulnerable domestic industries. They continue to argue that Chinese imports are threatening U.S. jobs in energy intensive industries, even though more than two-thirds of those types of products come from other similarly rich (and, in some cases, greener) countries.

President Obama spoke out against punitive trade measures inserted into the House bill when it passed in June, but declined to say whether he would veto a final bill if it contained the same elements. He has demonstrated little willingness to resist the siren song of protectionism, judging from his actions on trade since assuming the presidency. He also displayed a lack of appreciation for the foreign policy implications of protectionism in announcing tariffs on Chinese tires just prior to a climate summit where the country's cooperation was considered crucial.

Alienating the Chinese by threatening them with trade barriers would be a big mistake. And considering that the U.S. accounts for less than one percent of the market for Chinese energy-intensive goods as is, tariffs would create even less of an incentive among producers to clean up their production techniques for what would be a shrinking market. What they will do is increase the costs of U.S. producers who use Chinese inputs, and ultimately, of U.S. consumers.

Protectionism in the name of climate change carries little upside and much risk, for the environment and for the global economy. Leaders who care about either or both goals should start fulfilling their own pledges on open trade.

On trade, as on so much else, the populists have it wrong again. Free trade and globalization are great blessings to American families. Trade is delivering lower prices and more variety to consumers, especially the poor, while creating better paying jobs for the middle class. Beyond US shores, the spread of economic openness is building a more peaceful, democratic and humane world for our children.

Now may seem an odd moment to tout the benefits of trade for Main Street America. After all, unemployment is nearing 10 percent, manufacturing is in a slump, and global poverty is rising. But those are all the result of the current recession, a downturn that was not caused by trade but by misguided monetary and housing policies that were "Made in the USA."

During difficult economic times, import competition allows American families to keep their heads above water by delivering lower prices on staples such as food, clothing, and shoes. The prices we pay for goods exposed to global trade tend to rise more slowly than inflation or even fall. The expansion of product variety alone from trade delivers an estimated $400 billion a year in benefits to American families because of increased consumer satisfaction, according to a 2004 study by Christian Broda and David E. Weinstein for the National Bureau of Economic Research.

No consumers benefit proportionally more from trade than the poor, and nobody suffers more from existing trade barriers. The imported fresh fruit and vegetables, T-shirts and discounted sneakers sold at big-box retailers loom especially large in the budgets of poor and middle-class families.

Perversely, the highest remaining US trade barriers are aimed at products that are disproportionately made by poor people abroad and consumed by poor people at home. The $25 billion the US government collects each year through import tariffs is the most regressive tax in the federal arsenal. According to a study by the Progressive Policy Institute, a single mother earning $20,000 a year pays a much higher share of her income for import duties than a manager earning $100,000 a year. Labor unions and other groups that oppose tariff-lowering trade agreements are unwittingly serving a status quo that is punishing the poor.

Despite what the populists tell us, the consumer benefits of trade have not come at the expense of jobs or wages. As a candidate for president in 2007, Barack Obama was echoing CNN's Lou Dobbs when he told a cheering union crowd in Chicago that importing lower-priced T-shirts from developing countries was not worth the loss of jobs. "People don't want a cheaper T-shirt if they're losing a job in the process," he said. "They would rather have a job and pay a little bit more for a T-shirt."

Like most politicians, candidate Obama chose to represent a small but noisy special interest at the expense of the large majority of Americans. Only one-third of one percent of American workers are engaged in making clothing and textiles of any kind. That compares to the virtually 100 percent of Americans who buy and wear T-shirts and other clothing. If Americans are forced to pay higher prices because of import restrictions, a small number of jobs would be "saved" but at a huge cost to working families.

Across the entire US economy, trade accounts for a small share of job displacement. For every worker displaced by trade or outsourcing, 30 American workers typically lose their jobs because of other factors – most commonly technological change, but also domestic competition and changing consumer tastes. Think of the 30,000 workers at Kodak that have been laid off in the past five years, not because of imports, but because of the popularity of digital cameras and plunging film sales. My former calling, the newspaper business, has been hemorrhaging jobs since 2001, not because of unfair trade, but because of Craigslist and changing reader habits. "Job churn" is a fact of life in a dynamic, open economy.

A Big Lie of the trade debate is that we have been surrendering middle-class manufacturing jobs for low-paying service jobs. Since the early 1990s, the US economy has lost more than 3 million manufacturing jobs, but during that same period the economy has added 18 million service-sector jobs that are typically better paying. In fact, since 1991, two-thirds of the net new jobs created in US economy are in sectors such as health care, education, and business and professional service where the average pay is higher than in manufacturing.

The American middle class today earns its keep from better-paying service sector jobs. Knock on doors in a typical middle-class American neighborhood and you will meet teachers, managers, carpenters, architects, engineers, computer specialists, truck drivers, accountants and auditors, police officers and fire fighters, insurance and real estate agents, registered nurses and other health care professionals, and self-employed business owners.

Beyond American shores, falling trade barriers and the spread of technology have created a more prosperous, democratic, and peaceful world. Again, this may seem a counter-intuitive argument in the face of daily headlines about a global recession and ongoing violence in the Middle East and Africa, but here too we need to step back and assess long-term trends.

The past three decades of expanding trade and globalization have witnessed dramatic global progress. Between 1981 and 2005, the share of the world's population living on the equivalent of $1.25 a day dropped by half, from 52 to 25 percent, according to the World Bank. In China alone, the number in absolute poverty fell by 600 million. During this same period, real gains have been made in life expectancy, infant survival, nutrition, and literacy. Child labor rates have fallen by more than half. It is not a coincidence that the most dramatic gains against poverty have occurred in those countries that have most aggressively opened themselves to the global economy.

Meanwhile, as a global middle class has emerged, so too have more democratic forms of government. Trade has spread tools of communication and spurred the growth of civil society as an alternative to centralized government. As a result, the share of the world's population living in countries that respect civil liberties and the right to vote has climbed from 35 percent in 1973 to 46 percent today, according to Freedom House.

Fewer people are dying in wars today than in past decades, in large part because commerce has replaced military competition. Global commerce has allowed nations to gain access to resources through trade rather than conquest, while deeper economic integration has brought former enemies together and raised the cost of war. Even with the ongoing conflicts in Iraq and Afghanistan, young American adults living today are far less likely to fight and die in wars than their counterparts in the 1940s, '50s and '60s.

America and the world face daunting tasks today, as in generations past, but expanding trade is part of the solution, not part of the problem. Americans should have the same warm feelings toward free trade and globalization as they do toward iPods, email, online shopping, a well-fed child going off to school, and peace on earth.

America's highest remaining trade barriers are aimed at products mostly grown and made by poor people abroad and disproportionately consumed by poor people at home. While industrial goods and luxury products typically enter under low or zero tariffs, the U.S. government imposes duties of 30 percent or more on food and lower-end clothing and shoes - staple goods that loom large in the budgets of poor families.

To win favor with organized labor and other opponents of trade liberalization, Mr. Obama has either defended or actually raised barriers on precisely those products of most interest to poor households.

The tariff the president imposed on Chinese tires earlier this month was heavily biased against low-income American families. The affected tires typically cost $50 to $60 each, as compared with the unaffected tires that sell for $200 each. The result of the tariff will be an increase in lower-end tire prices of 20 percent to 30 percent. Low-income families struggling to keep their cars on the road will be forced to postpone replacing old and worn tires, putting their families at greater risk.

The "cash for clunkers" program the president championed, while not a trade measure, betrays the same indifference to markets that serve the poor. The program forced the disposal of the 700,000 cars and light trucks that were traded in, reducing supply and raising prices of used vehicles for families that cannot afford to buy new. Because of this president's policies, low-income drivers will find it more difficult to buy a car and to keep it running safely. The president's policy appears to be to let the rich drive their new, subsidized hybrid cars while the poor walk or take a bus.

Mr. Obama also displays no concern for the anti-poor nature of tariffs on food and clothing. As a senator and presidential candidate, he embraced the 2008 farm bill, which subsidizes farmers whose average incomes and wealth are higher than the typical non-farm family. The farm bill imposes anti-competitive tariffs and quotas on imported sugar, milk and cheese - a food tax that falls disproportionately hard on the poor, who spend a larger share of their budgets on food.

This summer, a group of sugar-using industries asked the Obama administration to relax quotas on imported sugar to avoid potential domestic shortages in the face of globally high prices. The administration refused, not only placing jobs at risk in the confectionery and food-processing sectors, but also forcing working families to continue paying higher prices than they should for candy, breakfast cereals, bakery goods and other sugar-containing products.

When he was running for president, Mr. Obama explicitly endorsed higher prices for T-shirts for every American family to save jobs in the small and declining apparel sector. At a debate before union members in Chicago in August 2007, he said, "People don't want a cheaper T-shirt if they're losing a job in the process. They would rather have the job and pay a little bit more for a T-shirt."

The future president ignored the fact that every poor family must buy those shirts to keep themselves clothed, yet only one-third of 1 percent of American workers make clothing or textiles of any kind. A wealthy politician or TV commentator need not care about the price of a T-shirt or other everyday consumer items, but millions of poor and middle-class American families do care.

A few liberal Democrats still care, too. Edward Gresser of the Democratic Leadership Council has done more than anyone to expose the unfair, anti-poor bias of the U.S. tariff code.

In his 2007 book Freedom From Want: American Liberalism and the Global Economy, he calculated that a single mother earning $15,000 a year as a maid in a hotel will forfeit about a week's worth of her annual pay to the U.S. tariff system, while the hotel's $100,000-a-year manager will give up only two or three hours of pay.

The $25 billion in revenue raised each year from import duties represent by far the most regressive tax the federal government imposes. Yet the Obama administration and the Democratic Congress have refused to move forward with trade agreements that would lower trade taxes that fall most heavily on the poor. By supporting the farm bill, but not new trade agreements, the president has embraced the status quo rather than change.

This is the status quo that so many "progressives" in America, from Public Citizen to the AFL-CIO, are expending millions of dollars to defend. They reflexively oppose any trade agreements that would reduce those regressive tariffs. In contrast to what he says on the public stage, Mr. Obama so far has taken their side in the trade debate at the expense of poor American families struggling to keep their cars on the road, shirts in the closet and food on the table.

The Indians and the Chinese are furious with each other, as are the Europeans and the Americans. Most of this stems from new trade restrictions imposed despite repeated pledges from G20 countries to avoid protectionism.

To quell the anger and gain a constructive focus in Pittsburgh, leaders must recognize how outdated it is to view the world in terms of "us" versus "them." A crash course on the global economy is in order.

The largest "American" steel producer is the majority-Indian-owned Arcelor-Mittal, which has headquarters in Luxembourg and Hong Kong, and is listed on the New York Stock Exchange and five European stock exchanges.

The largest "German" producer, Thyssen-Krupp, a conglomerate with 670 companies worldwide, is investing $3.7 billion in a carbon and stainless steel factory in Alabama, which will create 2,700 permanent jobs there.

California's steel industry consists almost entirely of rolling mill operations that process imported carbon steel slabs from Brazil, Russia and other countries.

The Californian finished products are disqualified from President Obama's Buy American procurement rules for failing to meet the statutory definition of American-made steel. This illustrates the impossibility, futility and harm of attempting to define producers by national characteristics.

Today, the factory floor is no longer contained within four walls, one roof and national borders. Instead, the factory floor spans the globe, allowing firms to optimize investment and output decisions by matching production, assembly and other functions to the locations best suited for those activities.

Nokia is a Finnish brand but produces most of its components and performs most of its assembly in other countries.

Lenovo is a worldwide Chinese computer brand, but it maintains headquarters in Singapore and the U.S., operates research centres in the U.S. and Japan, and assembles products in India, Mexico, Poland and China.

Apple's ubiquitous iPods are designed in labs in California then assembled in China, drawing on labor and components from South Korea, Taiwan, Singapore and Japan.

This is true not only for big business but many of the goods now considered essential to our daily lives — from roses to screws to coffee.

Trade policies over the past 25 years have generally accommodated this new reality. According to the World Bank, between 1983 and 2003, only three countries (out of 136) increased overall trade restriction, while developing countries were some of the biggest reformers, reducing their weighted average tariffs from 29.9 to 9.3 percent.

To emphasise how these reforms are self-helping, two-thirds of those cuts were unilateral. Trade has also benefited from huge improvements in transport and communications.

These gains are often discussed in terms of their impact on producers but the consumer is by far the biggest winner, getting a more consistent supply and better choice of cheaper, better products.

This global factory has changed the old "us versus them" characterization of international trade for good — and for the good.

Trade is increasingly the process of importing a good, adding value to it, and then exporting it to another producer further down the production chain. These complicated production and supply chains rely upon the rapid flow of goods and services across borders.

The current economic crisis, however, has tested our leaders' commitment to these reforms. Political leaders condemned protectionism at the G20 meeting in November 2008 and then again in April 2009.

They returned home to yield to vested interests, imposing anti-trade measures that add complexity, cost and delay to internationalized production and supply chains.

Such an approach made no sense when times were good. It is especially wrong-headed when times are tough.

Banning containerized shipping (perhaps the most important technique in 20th-century trade) or broadband Internet connections (which have paved the way for millions of call-center jobs) would clearly be ridiculed.

Yet, it is equally ludicrous for governments to promote "temporary" tariffs to shelter "domestic" industries, or subsidies for "local" producers, or "environmental" regulations that would hobble foreign competitors.

World leaders need to understand this in time for Pittsburgh. The only real stimulus the global economy needs is to continue the reforms that have guided the past 30 years of unprecedented global expansion: reduce trade barriers and remove the regulations and administrative burdens that prevent people from maximizing their potential in the global economy.

Most Americans believe in competition. We are better off when a dozen restaurants and a half-dozen auto repair shops compete for our business instead of only one or two. By expanding the number of producers selling goods and services in the domestic market, trade safeguards and intensifies competition. The result is lower prices, more variety and better quality for tradable products. Free trade is the market's trust buster.

Free trade means we can buy fresh-cut flowers from Colombia in the middle of winter, along with fresh fruit from Chile and fresh vegetables from Mexico. Free trade means we are more likely to find the style and size of shirt we want on the shelves at department stores.

The consumer benefits of variety can be harder to quantify than a simple drop in price, but they are just as real. A 2004 study by the National Bureau of Economic Research found that the real incomes of American families are about 3 percent higher because of the greater variety that imports bring. That translates to a real gain of $1,300 per person or more than $5,000 for a family of four just from the expanding varieties that trade has brought to the marketplace.

Imports from China have delivered lower prices on goods that matter most to the poor, helping to offset other forces in our economy that tend to widen income inequality. A 2008 study found that trade with China has helped to offset nearly a third of the official rise in income inequality from 1994 to 2005. Lower prices on goods imported from China have more than compensated for any downward pressure on low-skilled wages because of U.S.-China trade.

Imposing steep tariffs on imports from China would, of course, hurt producers and workers in China, but it would also punish millions of American consumers through higher prices for shoes, clothing, toys, sporting goods, bicycles, TVs, radios, stereos, and personal and laptop computers.

It would disrupt supply chains throughout East Asia, invite retaliation, and jeopardize sales and profits for thousands of U.S. companies now doing business with the people of China. Sanctions of the kind contemplated in Congress would also violate the same set of international trade rules that members of Congress accuse China of violating.

We should insist that our government adopt trade policies that are best for most Americans, regardless of what other countries do. And that means pursuing trade policies that spread benefits to the widest possible number of Americans, especially the poor and middle class, who have the most to gain from removing the final remaining barriers that separate us from the global marketplace.

Germany's police union, the Bund Deutscher Kriminalbeamter, estimates that about 50,000 cars destined for the scrap yard under Berlin's trade-in scheme have been illegally resold to Africa and Eastern Europe. The government had paid around €125 million for these vehicles to be destroyed so that people would buy new, more fuel-efficient cars. German environmental group Deutsche Umwelthilfe predicts a doubling of illicit exports by the end of the year. It's probably only a matter of time before American clunkers will likewise find their illegal way to the streets of Mexico and beyond. And humanity would be better off if they did.

Imagine if the Salvation Army were ordered to destroy all the used clothing and furniture it receives instead of distributing it to the poor. No doubt this would be considered an outrage. But it is no less economically foolish and morally repugnant to deny poor people in the developing world access to these old cars.

The analogy is of course not exact. Unlike the Salvation Army, the German exporters as well as the African importers are smuggling these cars for personal gain, not out of charity. Yet the welfare benefits for Africa's poor are real, regardless of the motive. And for the record, the German and U.S. governments have forbidden giving away traded-in clunkers along with their export.

The scheme's advocates usually cite economic and environmental reasons — neither very convincing — for why the old cars have to be destroyed. The economic argument says that scrapping cars creates artificial scarcity, thus boosting demand for new auto sales in a recession. Leave aside that scrapping clunkers also raises the prices of used cars, thus penalizing poorer consumers. More importantly, there is evidence that the scheme triggered far fewer additional car sales than assumed. Consulting firm Macroeconomic Advisers estimates that in the U.S. "roughly half of the 250,000 in new sales would have occurred in the months following the conclusion of the program, and the other half would have occurred during the program period anyway." So all the scheme did was to transfer, rather than create, wealth by unnecessarily bribing people to make long-planned acquisitions.

But even where the subsidies may have caused genuine new sales, more money spent on cars simply means less money is available for other items. The German Retail Federation, for example, complains that the cash-for-clunkers program is "sucking out spending" as retail sales fell 1.3% in May and 1.8% in June. For the overall economy, therefore, the net result is probably zero. The idea that destroying items of value will boost the economy might be called in this context, the broken windshield fallacy.

But let's assume the scheme did create additional consumption. There are still far better and fairer ways of boosting demand. Even Keynes, the godfather of government stimulus programs, recommended paying people to dig and fill up ditches — a senseless but at least non-destructive activity. Exporting clunkers produces exactly the same outcome as destroying them — it reduces the supply-demand gap. At the same time, it also creates jobs in the export-import and transport industries in the rich and poor countries while giving people in the developing world access to cheap cars.

This is where the environmental argument for destroying the clunkers comes in. The old cars must disappear, we are told, because they contribute to global warming. Let's look first at the rather dubious claim that trading in your old car for a more fuel-efficient new one reduces carbon emissions. If half of the new sales would have occurred anyway and the other half merely brought forward purchases rather than created new ones, then the real mileage effect appears quite limited. What's more, the energy required to manufacture a car accounts for as much as 45% of its lifetime energy consumption. So replacing old cars with new ones requires a big up-front energy investment. And crushing old cars and converting them to steel consumes more energy than exporting them.

It is true that selling clunkers to the Third World will increase emissions in those countries by increasing the number of cars on the road. But denying those poor people access to affordable cars means lowering their living standards. Lower living standards will of course always reduce energy consumption, but surely that cannot be a desirable policy objective.

Moreover, many of our clunkers are bound to be more efficient and more environmentally friendly than cars currently on the roads of many of the world's poorest countries. Selling the clunkers to them, therefore, could defray the cost of the clunkers programs while also upgrading the stock of cars in Africa and elsewhere. Just as the Salvation Army takes clothes that are one person's junk and sells it to others who are happy to get a good deal on used clothes, the clunkers programs could be moving the cars to where they are most valued, instead of destroying them for scrap.

The availability of cheap used cars will of course only make a marginal difference for people in the developing world. Yet there are no good reasons to deny these people even a marginal improvement of their living standards. Seen in this light, criminals exporting clunkers to Africa are doing more to increase economic welfare than moralistic German politicians and environmentalists spending taxpayers' money to deny Africans a cheap ride.

If the U.S. trade deficit were to disappear, do you think that would be a good or bad thing? For years, many in the media and the political world wailed about the U.S. trade deficit, but it is rapidly disappearing — and the consequences are going to be disastrous.

The table shows the U.S. trade deficit dropped 52 percent between January and May of this year, as compared to the January-through-May periods of the two previous years. During the same interval, exports of goods and services dropped 19 percent and imports dropped 28 percent. The U.S. trade deficit might disappear within the next year.

Over the past several decades, many foreign countries — notably Japan and China — exported much more to the United States than they imported, and as a result, they accumulated several trillion U.S. dollars. Most of those dollars were, in turn, invested back in the United States. Foreign individuals, companies and governments bought U.S. government securities. They invested money in U.S. real estate, often spending funds to renovate old hotels and shopping centers. They invested money in the U.S. stock market and in new high-tech start-ups.

All this investment greatly benefited the United States by keeping interest rates lower than they otherwise would have been and providing more capital to U.S. businesses, which then were able to hire more workers and invest in productivity-enhancing machines and software. But it is all disappearing.

Exports have been falling faster in Germany and Italy than in the United States, and in Japan, they have been falling more than twice the U.S. rate. This means those countries, and most others, will earn fewer U.S. dollars. If they have fewer dollars, they will have less money to invest in the United States, which means higher long-term U.S. interest rates and thus less productive investment in U.S. plants and equipment, which, in turn, will mean fewer new jobs will be created.

When trade expands because of fewer trade barriers and growing global demand, it is a win-win situation for both exporters and importers. The world's consumers have access to more goods and services at lower prices (which means they have a rise in their real incomes), and the world's producers have many more customers and thus are able to expand production and create jobs.

However, when trade declines sharply, as it is doing, the opposite happens. As exports decline, people lose their jobs, causing further declines in demand for both domestically produced and imported goods and services.

Governments cannot spend their way out of this problem. More spending leads to higher taxes or greater deficits. Higher taxes depress demand and the incentives to work, save and invest. Higher government deficits suck savings by individuals and businesses out of the productive sector into financing nonproductive government debt — leaving less money for investment in new plants and equipment and job creation.

One international financial expert, who has a long record of correctly seeing things that others have missed, Criton M. Zoakos, noted: "In Europe, the U.S. and Japan, massive financial bailout programs ... have committed approximately $35 trillion of public funds to support financial asset prices at pre-crisis levels. ... All of these governments won initial public approval for these stupendous bailout commitments by claiming that they were needed to restore credit flows to 'businesses and households' and save jobs. However, the fact is that nine months after approval of these plans, and the commitment of $35 trillion, lending to non-financial businesses and to households has declined in the United States (by 5.5 %), Britain (by 5.6%), Eurozone (by 0.4%) and Japan (by 3.4%)."

The political leadership in the major economic powers, failing to learn the lessons of history, has been pursuing policies that can only result in failure, and the leaders seem to have little idea of what to do next. Mr. Zoakos rightly calls the powers "zombie governments." Most of the opposition parties in leading countries (including the Republican Party in the United States) are all too muddled in their thinking about what to do next and hence are inarticulate about laying out solutions the body politic can understand readily. The solutions are not rocket science and are well-known to thoughtful people:

• Reducing existing trade barriers (not increasing them as is being done).
• Strengthening property rights (not undermining them as was done in the Chrysler and GM bankruptcies).
• Reducing tax rates on labor and capital (not increasing them as the U.S. Congress and administration are in the process of doing).
• Applying strict and real cost-benefit analysis to new and existing regulations — including financial and environmental (rather than regulating to satisfy the emotions of the "politically correct").
• Reducing all government spending by again applying real cost-benefit tests (rather than making grants to political cronies and falsely labeling them economic stimulus).
• Strengthening the dollar and other currencies by reducing debts and government financial guarantees that cannot be serviced.

Unfortunately, none of the above solutions will be undertaken soon in the United States and elsewhere. Billions of people will suffer needlessly, and the corrupt and ignorant political class will continue to lie, eat and drink at our expense.

Reacting recently to a provision in the climate change bill that would impose trade penalties against nations that do not limit carbon emissions enough, the president said, "At a time when the economy worldwide is still deep in recession and we've seen a significant drop in global trade, I think we have to be very careful about sending any protectionist signals."

In that mild rebuke of protectionism lingers the essence of the administration's nascent trade policy: conditional, ambiguous and not particularly reassuring.

Earlier this year, the president suggested that Congress avoid language in the stimulus bill that could provoke a trade war. Congress responded by pruning the bill's most overtly protectionist provisions. But "buy American" fever has nonetheless permeated the government procurement market. Uncertainty surrounding the arcane rules has caused contractors to render their own judgments about what qualifies. Not only have eligible foreign firms been excluded from the market, but U.S. firms that use imported raw materials (including California's entire steel industry) also have been shut out.

Canadian municipalities have responded with "don't buy American" rules, while the Chinese and others have introduced their own buy-local provisions, all to the chagrin of U.S. exporters and the general economy.

One would expect the president to respond with dispatch, at the very least issuing clear implementing guidelines. Instead, the Obama administration has done nothing but "seek comment." Our comment is this: The president's disregard for the matter is slowing economic recovery, tempting further escalation by our trade partners and cementing the United States' reputation as an international trade scofflaw.

Likewise, when Congress defunded a program that enabled Mexican trucks to operate on our roads -- placing the U.S. in violation of the North American Free Trade Agreement, Obama offered assurances of a quick resolution. Five months later, there is no fix in sight. To hasten a resolution, the Mexican government imposed $2.4 billion in retaliatory duties on about 90 U.S. exports, and a Mexican trucking association filed a $6-billion lawsuit against the U.S. government.

The reduction in cross-border trade and investment cannot be the economic elixir the president had in mind, nor is the dispute his preferred launching point for diplomatic relations with Mexico. Yet the administration is content, after five months, to just study the problem. How much study is needed to conclude that blatant violation of our NAFTA obligations, plus potentially $8.4 billion in direct costs, plus higher transportation costs on the entire North American supply chain for the benefit of the Teamsters, is a bad idea?

Meanwhile, despite claims that the administration would work with Congress to pass long-pending trade agreements with Panama, Colombia and South Korea, those deals remain hostage to cynical politics.

The president speaks of a renewed internationalism and multilateralism in foreign policy, yet his trade policy whiffs of nationalism and unilateralism. That won't help restore America's image abroad, where most countries regard U.S. trade policy as the face of U.S. foreign policy.

The inconsistency between the president's words and deeds betrays a man concerned with politics above all else. But the politics of trade are changing, and Obama has an opportunity to shepherd his party back from the fringe.

Recent polls indicate that Americans are shedding their skepticism about trade's benefits. The founding of the Congressional Pro-Trade Caucus by Rep. Henry Cuellar (D-Texas) this year suggests that protectionism is not the Democratic Party's creed but rather that of a loud minority led by Sen. Sherrod Brown (D-Ohio) and Rep. Michael Michaud (D-Maine).

Democrats who seek to restrict trade must be held accountable when they also claim to speak for Main Street. Middle-income Americans spend more of their paychecks on imports than do wealthy Americans. Lower-income families spend a higher percentage of their budgets on necessities such as food, clothing and shelter (steel, lumber, cement), all of which face above-average import duties because of the efforts of unions and other protectionist lobbies. Tariffs are a highly regressive tax, which is supposed to be anathema to every card-carrying Democrat.

In the coming days, Obama will make his first major speech on the future of U.S. trade policy. If he really wants to bring his party into the 21st century and is truly committed to economic recovery and diplomatic fence-mending, he must ditch the flaccid rhetoric and launch an unabashedly pro-trade agenda now.

Today the SDR has two roles: as a unit of account, and as a line of credit between IMF members. Neither role makes it a currency. The SDR's value is defined as equal to that of a basket of four currencies: the U.S. dollar, the euro, the yen, and the pound sterling. Member-states occasionally agree to issue SDRs to themselves, and these serve as mutual lines of credit, providing needy countries access to hard currency. SDR allocations represent purchasing power through a credit facility, not through creation of a new currency.

Chinese officials and some leading economists want a greater role for SDRs in foreign exchange reserves. This would shift currency risk away from China to the IMF. But other IMF members would have to pick up that risk, and there is no reason for them to subsidize China. Underlying the SDR issue is a global struggle for political power. But China has a large and growing GDP and tax capacity, which may overtake that of the United States one day. Before then, the Chinese yuan will probably become convertible, and become a highly sought-after reserve currency in its own right. The real currency challenge to the dollar will come from the yuan, not the SDR.

The era of laissez-faire capitalism is over, it is said, as if the era of laissez-faire capitalism ever really began. Still, globalization has helped open markets around the world.

At a time of economic crisis, Benn Steil and Manuel Hinds mount a well-documented defense of globalization, "the extension of consensual economic exchange across borders." They warn: "[C]harges that financial markets and institutions, such as the International Monetary Fund (IMF), are violating fundamental rights of states remain largely unchallenged and have a natural and growing appeal to organized interests who are only too willing to harness the powers of state organs in the name of reclaiming lost sovereignty."

Money, Markets and Sovereignty is a surprisingly easy read, given the complicated issues covered. In it, Mr. Steil and Mr. Hinds consistently challenge today's statist nostrums.

Critics often treat globalization as a new phenomenon. Yet, the authors observe, "broadly speaking, the view that increasing economic and cultural interconnections across the globe are a positive development, to be advanced rather than resisted — has a much older and historically esteemed pedigree than is widely recognized."

The authors explore the relationship between "globalist thought" and "the notion that individuals have certain natural universal rights that transcend the will of rulers." This history "highlights the fact that today's trade mythology — that autarky is the natural state of affairs and that people should not buy from foreigners except with dispensation from the state — is hardly one with a compelling pedigree."

Particularly beneficial has been the development of private commercial law. But, note Mr. Steil and Mr. Hinds: Many globalization critics hope "to preempt the organic development of common international commercial practice and expectations, and instead to dictate ex nihilo the form and scope of permissible facets of globalization."

The authors bust several anti-globalization myths. Mr. Steil and Mr. Hinds explain: "Anti-globalization writers, in contrast to their pro-globalization counterparts, do not tether their arguments to the history of ideas. They do not defend a philosophy; they endorse no particular principles of just conduct or lawmaking. Rather, their arguments are largely based on defending visions of a sublime past, now being supplanted by what are alleged to be new and illegitimate forces."

Does globalization violate sovereignty, the authors ask? Yes — just as sovereignty has been routinely limited throughout history. Critics complain about the adverse impact of individual choice, an argument that, Mr. Steil and Mr. Hinds argue, often turns out to be "an open invitation to authoritarianism. It is, not surprisingly, heartily endorsed by Chinese state censors."

Complaints about income inequality actually acknowledge globalization's positive impact on international poverty. The authors explain: "Following conspicuously pro-globalization strategies over the past decade, [China's and India's] exceptional progress in bringing hundreds of millions out of poverty has forced critics of outward-oriented economic policies to shift their focus away from poverty and toward the wealth gap."

The claim that globalization somehow "destroys nations" could not be "more welcome to despotic rulers of poor nations and less conducive to the interests of their people." Finally, the benefits of globalization, the authors contend, are real, not just theory; unfortunately, costs often are more visible and thus politically more salient.

Money, Markets and Sovereignty also addresses monetary "sovereignty," the increasing control of nation states over money and its value. Mr. Steil and Mr. Hinds discuss the creation of money, which originally was largely commodity-based and served to greatly expand commerce.

Even as countries moved toward issuing paper currency, the leading states backed their money with gold. The authors think highly of commodity-based money, though the flawed systems established after World Wars I and II created problems that "were eminently foreseeable — and indeed were not only foreseen but loudly warned of by a few souls." President Nixon ended the convertibility of dollars into gold in 1971, leaving the United States with purely "fiat" money — that is, money whose value is set by government.

The result has not been pretty. As Mr. Steil and Mr. Hinds write, much international economic disorder that has "come to pass is once again being widely blamed on a lack of economic sovereignty — this despite the fact that it was a predictable, and indeed predicted, result of a return to economic sovereignty in the monetary sphere."

Previously, trade and monetary liberalization tended to move together. In recent years, trade has been increasingly freed while money has been increasingly regulated.

In theory, politicians, with economists in tow, "could systematically outsmart the market, making it dance to their tune. Through the manipulations of monetary variables, such as the rate of monetary creation, the nominal interest rate, and the exchange rate, they could durably improve the performance of the real economy." Unfortunately, governments have mostly failed.

Mr. Steil and Mr. Hinds close with a discourse on the dollar's future. They warn: "There is little basis for presuming that this premium [to dollar-denominated assets] will persist, that investors will indefinitely sacrifice yield vis-a-vis investments denominated in other credible currencies." To restrict currency manipulation by Washington, the authors advocate "a renewed statutory framework for the Fed, one which explicitly acknowledges the global role of the dollar and the dependence of the U.S. economy on foreign confidence in it."

More broadly, they contend that it is critical to resist attacks on globalization. In their view, the issue is not so much philosophical, even though globalization reflects ideas deeply imbedded in the Western experience. The principal issue is practical. Warn Mr. Steil and Mr. Hinds: "Rolling back economic liberalism in the cause of reclaiming 'sovereignty' is a well-documented recipe for stifling wealth creation, entrenching poverty, and ratcheting up international conflict."

How do the Obama administration and Democratic Congress respond? By retreating economically from the region. Barack Obama called the U.S.-South Korean free trade agreement "badly flawed" and urged the Bush administration not to even submit it for ratification.

U.S. Trade Representative Ron Kirk calls the agreement "unacceptable." Although increased trade with South Korea is "one of the biggest opportunities we have," he affirms that the administration "will step away from that if we don't get it right."

This policy represents economic and geostrategic folly. Washington should be expanding American investment and trade opportunities in East Asia. The starting point should be to ratify the South Korean trade agreement.

U.S.-Korean trade ran more than $80 billion in 2008. The seventh largest merchandise trading partner of the U.S., Seoul is a major importer of aircraft, cereals, chemicals, machinery and plastics. Even a small expansion of U.S.-Korean trade would offer significant economic benefit.

South Korea has been a notoriously closed market. The free trade agreement helps change that. Jeffrey Schott of the Peterson Institute for International Economics writes: "The U.S.-Korea pact covers more trade than any other U.S. trade agreement except the North American Free Trade Agreement" and "opens up substantial new opportunities for bilateral trade and investment in goods and services."

The pact does not eliminate all economic barriers. Autos have been a sticking point, but the pact offers important progress. Writes Schott: "The FTA outcome on autos makes both sides better off than they would be in the absence of the bilateral deal" and "the FTA liberalization of farm trade predominantly benefits U.S. agricultural exporters."

For instance, tariffs on U.S. vehicles immediately would be eliminated while America's protectionist 25 percent tariff on trucks gradually would be phased out over a decade.

Further concessions will be hard to get. South Korean President Lee Myung-bak has been attacked for easing restrictions on American beef imports. Trade Minister Kim Jong-hoon declared: "There are (to be) no renegotiations or additional negotiations."

The likely increase in U.S. exports, perhaps $20 billion annually, would be particularly helpful during the deep recession. Overall, the U.S. International Trade Commission figures that American exports would rise nearly twice as much as imports.

Strengthening trade ties could help continue American influence in East Asia as China rises. U.S. companies have been pushed into second and even third place in South Korea and Japan. Observes Robert Kapp, a longtime president of the United States-China Business Council: "The growth of Korean-Chinese economic action has been even more impressive than China's expanding ties with other trade and investment partners."

South Korea is not waiting for the U.S. It has negotiated trade agreements with regional and European countries.

Failing to ratify the South Korean pact is likely to result in permanent economic and foreign policy damage at a time when China is rapidly expanding its influence.

But restoring the pro-trade consensus must be a priority of the Obama administration. If the United States indulges misplaced fears, restrains economic freedoms, and attempts to retreat from the global economy, the country will suffer slower economic growth and have greater difficulty facing future economic and foreign policy challenges.

America's trade skepticism is largely the product of a top-down process. Perceptions have been shaped overwhelmingly by relentless political rhetoric that relies on three myths. Congress and the media have spoken for years about the decline of U.S. manufacturing as though it were fact, when the overwhelming evidence points to a sector that, until the onset of the current recession, was robust and setting performance records. Both lament the U.S. trade deficit without attempting to convey or even understand its causes, meaning, or implications. And both attribute these alleged failures of policy to lax enforcement of existing trade agreements.

President Obama should reexamine these premises. He will find that they are long on fallacy and short on fact. Meanwhile, the president will find it necessary to rein in the congressional leadership's increasingly provocative approach to trade policy if he is to have success repairing America's foreign policy credibility.

The determination of the president to arrest and reverse America's misguided and metastasizing aversion to trade could dramatically improve prospects for restoring the pro-trade consensus.

Many governments and economists are increasingly unhappy with the US dollar as the world's main reserve currency. Momentum is building up for using the Special Drawing Rights (SDR) of the International Monetary Fund to supplement or rival the dollar as the main global reserve currency. The SDR, however, is more like an exchange-traded fund (ETF) than a currency, and is not a viable alternative to the dollar.

The IMF issues no SDR currency notes. This is because the SDR is simply a potential claim on the national currencies of IMF members. Those cashing in their SDR allotments for dollars or euros have to pay a low interest rate until they repurchase those allotments, so the SDR is effectively a low-interest line of credit. It is also a synthetic unit of account, a monetary basket with the following weights: US dollar 44%, euro 34%, yen and sterling 11% each.

To become a true currency, the SDR would have to be a fully convertible instrument, not a line of credit, underwritten by countries with "hard" currencies. Politically, this seems unfeasible save in modest quantities. Even if the political hurdles are overcome, the SDR will remain a basket of national currencies, not an independent currency. To this extent, it will resemble an exchange traded fund (ETF), whose value is that of a basket of equities, such as the Dow Jones industrial average, or the S&P 500. Such ETFs merely provide a simple way of investing in a basket of equities, and are not a rival form of equity. Similarly, the SDR can merely provide a convenient way of holding a basket of currencies, and will not be an alternative reserve currency.

The dollar is the world's main reserve currency because the US economy is the biggest in the world, and the US government can tax its citizens to service its national debt. The IMF has no national income and no authority to tax its members. The IMF cannot issue any credible currency of its own, and can only offer a currency ETF.

China is especially unhappy with today's US dollar dominance. Two-thirds of its $2 trillion of foreign exchange reserves is held in dollar securities. The Obama administration is running up record fiscal deficits, and this may eventually lead to a collapse of the dollar, and hence of the value of China's reserves. So Zhou Xiaochung, China's central bank governor, is seeking to increase the role of the SDR as a reserve currency, as an alternative to today's dollar-dominated regime. Strong support has come from an UN committee headed by Nobel laureate Joseph Stiglitz, and from other eminent economists, including Fred Bergsten of the Peterson Institute of International Economics and Martin Wolf of the Financial Times.

These economists view the existing global reserve system as grossly inadequate and needing overhaul. True, but the SDR is not a viable alternative. Suppose China, in search of diversification, shifts $1tn of its reserves from dollars into SDRs (some economists want this to be done in an IMF substitution account). Given the currency weights in the SDR, this would be no different from China putting $440bn into dollars, $340bn into euros, and $110bn each into yen and sterling, something it can do without needing SDRs. So, the attempted diversification will simply rearrange the existing furniture.

SDR issues represent potential liabilities for the underwriting economies — the US, EU, Britain and Japan — which are therefore wary about new issues. Western legislators have in the past criticized SDRs as inflationary. This explains why only $32bn of SDRs have been issued since 1971. The G20 agreement on another $250bn-worth has been made possible by the global meltdown, which has put inflation on the back-burner. This mood cannot last. It will be politically and financially unfeasible for countries underwriting SDRs to issue enough to rival other hard currencies held in global foreign exchange reserves.

The current global meltdown owes much to macroeconomic imbalances. After the Asian financial crisis in 1997-98, many Asian countries, including China, decided to maintain large foreign exchange reserves to guard against a repeat disaster. But the mirror image of such huge Asian surpluses was huge deficits in the US and UK. These unsustainable imbalances have now ended in tears. So economists seek ways in which Asian countries' desire for high reserves can be met without their having to pile up dollars. Large currency swaps could be a partial answer. But not the SDR.

These scare tactics were on display as world leaders prepared for the London meeting of the Group of 20 on April 2. The countries represented in this grouping account for two-thirds of the world's population and 90% of its gross national product.

After failing to predict a slow-down, let alone a panic, the International Monetary Fund finally issued a scary forecast on March 19 — just in time for the G-20 meeting. This forecast allowed the IMF to peddle its prescriptions. Once the G-20's communiqué was released, doom and gloom were temporarily swept aside. The political classes had just struck a mother lode.

The G-20 winner was the IMF. The IMF's managing director Dominique Strauss-Kahn — a seasoned French socialist politician — could hardly believe the IMF's good fortune. At a press conference on April 2, Strauss-Kahn had this to say:

"Maybe some of you were in the IMF press conference at the end of the Annual Meeting last October. And if some of you were there, then you may remember that what I said at that time is that IMF is back. Today you get the proof when you read the communiqué, each paragraph, or almost each paragraph — let's say the important ones — are in one way or another related to IMF work."

If the G-20 summiteers come through with their pledges, the IMF's resources will be increased by over $750 billion (USD).

To put that in perspective, consider that the IMF's credits and loans outstanding at the end of 2008 were only $27 billion. As politicians confront a new crisis, the opportunists are playing the system and exploiting it for their own ends.

Much of the growth of government in the US and elsewhere occurs as a direct or indirect result of national emergencies such as wars and economic slumps. Laws are enacted, bureaux are created and budgets are enlarged. In many cases these changes turn out to be permanent.

As Robert Higgs verified in his 1987 classic, Crisis and Leviathan, crises act as a ratchet, shifting the trend line of government's size and scope up to a higher level. History provides many illustrations of how damaging this fallout can be.

Take the Great Depression. At that time, the organized farm lobbies, having sought subsidies for decades, took advantage of the crisis to pass a sweeping rescue package, the Agricultural Adjustment Act, whose title declared it to be "an act to relieve the existing national economic emergency."

Seventy-six years later, the farmers are still sucking money from the rest of society and agricultural policy has been enlarged to satisfy a variety of other interest groups, including conservationists, nutritionists and friends of the third world. Indeed, even though agricultural prices hit record highs last year, the river of government farm subsidies kept flowing.

Then, during the second world war, when government accounted for nearly half the US's gross domestic product, virtually every interest group tried to tap into the vastly enlarged government budget.

Even bureaux seemingly remote from the war effort claimed to be performing "essential war work" and to be entitled to bigger budgets and more personnel.

Even smaller crises have sent the opportunists into feeding frenzies. Let us return to the classic case of ever-opportunistic IMF. Established as part of the 1944 Bretton Woods agreement, the IMF was primarily responsible for extending short-term, subsidised credits to countries experiencing balance-of-payments problems under the postwar pegged-exchange rate system.

In 1971, however, Richard Nixon, then US president, closed the gold window, signalling the collapse of the Bretton Woods agreement and, presumably, the demise of the IMF's original purpose. But since then the IMF has used every so-called crisis to expand its scope and scale (see the accompanying chart).

The oil crises of the 1970s allowed the institution to reinvent itself. Those shocks required more IMF lending to facilitate, yes, balance-of- payments adjustments. And more lending there was: in the 1970-1980 period, IMF lending increased by 123%.

With the election of Ronald Reagan as US president in 1980, it seemed the IMF's crisis-driven opportunism might be reined in. Yet with the onset of the Mexican debt crisis, more IMF lending was "required" to prevent future debt crises and bank failures.

That rationale was used by none other than President Ronald Reagan, who personally lobbied 400 out of 435 congressmen to obtain approval for a US quota increase for the IMF. IMF lending ratcheted up again, increasing 108% in real terms during Reagan's first term in office. With the fall of the Soviet Union in 1991, the IMF reinvented itself again. According to the IMF, a temporary lending facility was needed "to facilitate the integration of the formerly centrally planned economies into the world market system."

The 1990s ended with the Asian Financial crisis (among others) — one that was misdiagnosed and made worse by the IMF's medicine. Never mind. The Asian crisis was yet another justification for more funding. During the 1990- 1999 period, IMF lending increased by 99% in real terms.

Not surprisingly, the events of September 11, 2001 did not catch the IMF flat-footed. On September 18, Paul O'Neill, the then US Treasury Secretary, had breakfast with Horst Kohler, the then IMF's managing director, to discuss the financial needs of coalition partners.

The IMF received a bit of a post-September 11 bounce. Then the IMF experienced a free fall, when the Federal Reserve (along with other central banks) pushed interest rates to record lows. The flood of new global credit was drowning the IMF until the credit bubble burst. That is when the IMF seized its opportunity.

The ratchet, of course, has many deleterious dimensions that reach well beyond public budgets. For example, on the same day the G-20 met in London, the US Financial Accounting Standards Board caved in to pressure exerted by the US Congress and altered the accounting rules for banks and other financial institutions.

Instead of valuing assets at prices they can fetch in the market (mark-to-market), banks will be allowed to use their own valuation models to value assets.

This accounting change brings to mind the fallout from another panic — the US panic of 1873. It was then that the publication of bank statements was suspended on the hope that "what you don't know won't hurt you."

Let's hope the current tidal wave of interventionism fades and a modicum of reason kicks in.

China had always been a UN Security Council member, and since 1990 was acknowledged as an economic powerhouse. But at the time the world bracketed India with Pakistan, because of their long history of aid and antagonism. In the 1990s, India and Pakistan required massive assistance from the IMF and World Bank.

That finally changed after the information technology revolution. In 2003-08 the Indian economy averaged almost 9% growth, second only to China's. India's economic feats catalysed former US president Bush's decision to break existing nuclear rules and forge a nuclear deal with India. Indians hailed this as the definitive de-hyphenation of India from Pakistan, which was denied a similar deal. Instead, Chindia denoted a new hyphenation with China.

This was always a stretch. The Indian economy grew fast in the last five years, but remained far behind China's. India's big population makes its GDP look big, but also means it has the largest number of poor people, infant deaths, maternal deaths in childbirth, and highest child malnutrition in the world. India cannot end Maoist violence in 160 of its 600 districts or insurrections in Kashmir and the North-East. The Indian state looks weak and incompetent even as the Chinese state looks strong and competent.

The gap between China and India has become glaring in the current global financial crisis. China has become a major global player, second only to the US, while India is barely on the radar screen. Many blame the US for financial excesses that triggered the meltdown. But the US says the problem originated in the massive trade surpluses of China, which accumulated foreign exchange reserves of $2 trillion, eight times as big as India's.

The US became dependent on China for selling its treasury bonds. China's surplus dollar holdings were dumped back on the US market. This, says the US, was massive enough to depress US interest rates, encouraging an overborrowing and overconsumption spree.

Maybe this analysis is exaggerated. But unquestionably the macroeconomic imbalances causing the global meltdown arose in the US and China. Although the G-20 group of countries met to work out solutions, many commentators (including Martin Wolf of the Financial Times) spoke of the emergence of the US and China as the G-2, the only group that really mattered. Historian Niall Ferguson coined the term Chimerica to represent the great new geopolitical reality — that the 21st century will be dominated by China and America.

India scarcely matters. It is still a country that instinctively seeks aid and foreign concessions. On the international scene, it is a taker, not a giver. China, however is now a giver. In the proposed expansion of the IMF's lending, China has offered to supply $40 billion, against $100 billion from Japan and possibly the US. India does not figure in this giver's list — it would rather be a receiver.

Even as China gets hyphenated with the US, India is getting re-hyphenated with Pakistan via Islamic militancy. India looked clueless in dealing with a series of bomb explosions in 2008. Then 26/11 exposed its vulnerability to a suicide attack. The Indian media and political class sought to blame everything on Pakistan. Yet, India could not find and arrest all the local conspirators.

Pakistan is being eaten alive by the Islamic militants it once incubated. Islamists have ousted the state in the Federally Administered Tribal Areas and parts of the North West Frontier Province. The chief minister of NWFP has fled to London. Terrorists struck at the Sri Lanka cricket team in Lahore, leading other cricketing countries to cancel future engagements in Pakistan.

Indians smiled at Pakistan's discomfiture. But then came the IPL cricket league fiasco. The Indian government declared it could not guarantee the safety of foreign cricketers if the league matches were held at election time. So, the IPL shifted to South Africa. That country is reputed to be the crime capital of the world. It is also having an election, but, unlike India, can handle that and the IPL simultaneously.

So, India is getting re-hyphenated with Pakistan as a place where international cricket faces grave security risks. South Africa, whom nobody has ever hyphenated with China, is streets ahead of India in this respect. So, let's say farewell to the illusion of Chindia. The reality is Chimerica.

Since the 1940s, the US has led the charge to remove international barriers to goods, services and investment. The result: a global trade explosion that has enriched American families, spurred innovation, enhanced our security and helped millions escape poverty. Every US president since Herbert Hoover has championed free trade because of its proven benefits.

Since his inauguration, US President Barack Obama has expressed a desire to follow in his predecessors' footsteps. Meeting his Canadian and Mexican counterparts, Mr Obama backed away from his "overheated campaign rhetoric" on the North American Free Trade Agreement (Nafta). His nominees for commerce secretary and US trade representative have been vocal trade advocates, and he has often celebrated open markets and vowed to resist "escalating protectionism".

Unfortunately, Mr Obama's inaction has undermined this pro-trade rhetoric. Mr Kirk's confirmation took a lackadaisical two months, forcing US officials to cancel World Trade Organisation and bilateral trade negotiations. Meanwhile, new Energy Secretary Steven Chu carelessly suggested using tariffs to protect US manufacturers from countries that haven't addressed carbon emissions — only a day after China's top climate change official warned such carbon tariffs could start a trade war. This has all the makings of a captainless ship.

Mr Obama has not countered the protectionist impulses of his Democratic colleagues in Congress. Without White House leadership, Congress has injected anti-trade features into the year's two spending bills: the "stimulus" and the 2009 Omnibus Appropriations Act.

Several reports have spotlighted the international angst over the stimulus bill's "Buy American" provision and the US$2.4 billion in retaliatory tariffs that Mexico applies to US exports because of the omnibus bill's ban on Mexican trucks (in direct violation of Nafta). But less reported are the bills' other protectionist gimmicks: the stimulus allows US lumber producers to ignore the federal courts and keep US$92 million in illegally collected Canadian and Mexican lumber duties; the omnibus hits imports of both Chinese chicken and Vietnamese and Chinese textiles, and it enables mandatory country labelling for all imported food.

These measures have been rebuked by many of America's closest trade partners, and Mr Obama has been lectured on protectionism from, among others, Canadian Prime Minister Stephen Harper, European Union Trade Commissioner Catherine Ashton, Brazilian President Luiz Inacio "Lula" da Silva, and Chinese Commerce Minister Chen Deming. The message: on trade, America is an also-ran.

Because of today's rules-based multilateral trading system and the interdependence of global markets, US fecklessness on trade shouldn't lead to devastating protectionism akin to the Smoot-Hawley-induced tariff wars of the 1930s. But it's still a problem. In 2008, global trade contracted for the first time since 1982, and protectionist pressures abound. The WTO's Doha Round is comatose, even though an ambitious deal could inject US$2 trillion into the reeling global economy. Considering the US has steered every major trade initiative in modern history, any chance for significant progress on trade will disappear without strong American leadership — in word and deed.

Despite these problems, all is not lost. Mr Obama, although clumsily, has limited the damage from "Buy American" and pledged to reinstate the Mexican trucking programme, and the other missteps are similarly containable. But if he wants to restore US leadership on trade, Mr Obama must move quickly from defence to offence. He should immediately reaffirm America's unwavering commitment to expanding global trade, not just "resisting protectionism". He should also tell Democratic leaders in Congress that he will not allow protectionist nitpicking to define his trade agenda.

Finally, the president should announce his intent to treat anti-trade provisions in future bills like all other kinds of earmarks — make them public, transparent and extremely limited.

These steps will calm the current anxiety over America's wavering trade policy. They will also give the president the breathing room necessary to craft a long-term trade strategy — one that rehabilitates a domestic free-trade consensus and forges a proactive, politically feasible trade policy that will guarantee America's leadership in the global economy for the next decade.

One problem with this blame-game is that last year's recession was much deeper in many European and Asian countries than it was in the United States.

By the fourth quarter of 2008, as the nearby table shows, real US gross domestic product was just 0.8 percent smaller than it had been a year earlier. The contraction was twice as deep in Germany and Britain and much worse in Japan and Sweden.

In February, US industrial production was 11.8 percent lower than a year before -- while Singapore was down by 22.4 percent, Sweden by 22.9 percent and Japan by 38.4 percent.

What was the mechanism by which US problems were supposedly spread to other countries? It wasn't international trade. The dollar value of US imports didn't start to fall until August 2008, and imports of consumer goods didn't fall until September -- many months after Japan and Europe fell into recession.

Indeed, most of the economies that fell first and fastest were not heavily dependent on exports to the United States. Even Japan accounted for just 6.6 percent of US merchandise imports last year, compared with 15.9 percent for both Canada and China -- whose economies fared relatively well.

Even if all of the weakest European and Asian economies could plausibly blame all their troubles on the relatively stronger US economy, how could anyone possibly blame banks? There were no bank failures last year in Japan, Sweden, Canada or any other country on this list except Britain. And US and British banks didn't fail until September-October -- at least nine months after the Japanese and European recessions began.

Yet it's clearly US/UK banks being fingered as the villains. German Finance Minister Peer Steinbrueck, for example, criticized an "Anglo-Saxon" attitude in America and Britain that encouraged risky lending and investment practices because of "an exaggerated fixation on returns."

But Germany's GDP and industrial production was down 19.2 percent for the year ending in January -- versus an 11.4 percent decline in Britain and a similar US drop. Are we supposed to believe that German (and Japanese) firms are more dependent on US and UK banks than American and British firms?

Another problem with blaming the United States is that the timing is all wrong. If the US recession had simply spread to other countries like a mysterious infection, shouldn't the US economy have been the first to start contracting?

Yet US industrial production only started to decline from its peak after January 2008 -- long after production began to slow in Canada (July 2007), Italy (August 2007), France (October 2007) and the Euro area as a whole (November 2007). Aside from a one-month uptick in February 2008, Japan's industrial production peaked in October 2007.

By January 2008, when both the US and European recessions are said to have begun, the OECD leading indicators were lower by nearly 0.8 points from a year before in the US -- but down 2.3 points in Sweden, 2.8 points in Japan, 2.6 points in Korea and 4.1 points in Ireland.

Those leading indicators correctly anticipated much deeper recessions in the latter four countries. And the most famous leading indicator -- monthly stock prices -- peaked in October 2007 in the US and UK, four months after stocks had peaked in Japan and the Euro area.

What did all the contracting economies have in common? Not all had housing booms -- certainly not Canada, Japan, Sweden or the other countries at the bottom of the economic-growth list.

What really triggered this recession should be obvious, since the same thing happened before every other postwar US recession save one (1960).

In 1983, economist James Hamilton of the University of California at San Diego showed that "all but one of the US recessions since World War Two have been preceded, typically with a lag of around three-fourths of a year, by a dramatic increase in the price of crude petroleum." The years 1946 to 2007 saw 10 dramatic spikes in the price of oil -- each of which was soon followed by recession.

In The Financial Times on Jan. 3, 2008, I therefore suggested, "The US economy is likely to slip into recession because of higher energy costs alone, regardless of what the Fed does."

In a new paper at cato.org, "Financial Crisis and Public Policy," Jagadeesh Gokhale notes that the prolonged decline in exurban housing construction that began in early 2006 was a logical response to rising prices of oil and gasoline at that time. So was the equally prolonged decline in sales of gas-guzzling vehicles. And the US/UK financial crises in the fall of 2008 were likewise as much a consequence of recession as the cause: Recessions turn good loans into bad.

The recession began in late 2007 or early 2008 in many countries, with the United States one of the least affected. Countries with the deepest recessions have no believable connection to US housing or banking problems.

The truth is much simpler: There is no way the oil-importing economies could have kept humming along with oil prices of $100 a barrel, much less $145. Like nearly every other recession of the postwar period, this one was triggered by a literally unbearable increase in the price of oil.

But, despite the occasional dalliance with protectionism, treaties and good sense prevent a more serious romance.

Amid pledges of restraint from the big economies, India recently raised tariffs and placed other restrictions on some imported steel products.

Ecuador raised tariffs by 5 to 20% on 940 products. Argentina's restrictions include auto parts, textiles, televisions and shoes. And the Indonesian government is requiring civil servants to purchase only domestic products.

Similar actions have taken place in other countries and surely there will be more in the months ahead. But the risk of protectionism escalating to the point that it noticeably reduces global trade further is remote.

With the proliferation of international production, investment and joint ventures, the "Us versus Them" characterisation of global competition no longer applies.

It is now a competition between global supply chains to produce and deliver products made with parts and labour from many countries.

The successful supply chains are those with the fewest constraints — physical and administrative, including trade barriers.

According to recent estimates from the International Food Policy Research Institute, a US think-tank, if all World Trade Organisation members raised all tariffs to their maximum allowable rates, the average global tariff would double and trade would decline by 7,7% over five years, from the 5,5% growth this decade.

But, to put 7,7% in historical context, the value of global trade plummeted by 66% between 1929 and 1934, in the wake of the protectionist plague following the US Smoot-Hawley Tariff Act in 1930. In the 1930s there were no global rules, no sources of adjudication or remediation, and no generally accepted limits to unilateral actions by governments.

And there were far fewer domestic constituencies of any political consequence protesting against protectionism in the 1930s.

Now we have trade rules that work reasonably well and a vastly different global economy that makes import restrictions much more expensive to the country imposing them.

Most WTO members apply tariff rates well below their required or "bound" rates, a good indication that governments have little interest in the protectionist past.

Today there are burgeoning domestic constituencies in numerous countries who favour lower tariffs because their livelihoods depend on access to imported raw materials, components, and capital equipment.

When governments raise trade barriers, they deter foreign investment and reduce the appeal of their countries as locations for research, production, or assembly operations in the supply chain.

That dynamic is easier to appreciate when one considers that 55% of all US import value in 2007 consisted of raw materials, intermediate goods and capital equipment — the kinds of products the construction and manufacturing sectors purchase.

Put in this light, it is more obvious that tariffs raise the costs of production, which undermines economic growth — or, as in the current case, economic recovery.

Mexico, for example, understands this. In January it started cutting rates on about 70% of its tariff schedule. Those 8 000 items comprising 20 different industrial sectors accounted for about half of all Mexican import value in 2007.

The objectives are to reduce business operating costs, attract and retain foreign investment, raise productivity and give consumers more, better and cheaper goods and services.

Mexico is not alone. In February, Brazil suspended tariffs entirely on some capital goods and reduced duties to 2% on a wide variety of machinery and capital equipment, including communications and IT. Some analysts worry less about border barriers and more about camouflaged protectionism that favours "domestic champions", discourages competition or encourages "buying local".

It's not Thirties-style, tit-for-tat trade wars that they fear but Seventies-style government intervention that will limit choices, stymie competition, and strangle growth.

That kind of protectionism is already in evidence and, because it is more opaque, is more prone to abuse.

But, like tariffs, those kinds of policies are unsustainable because they will undermine trade, investment and economic growth.

Governments that stimulate trade and competition offer their people the greatest opportunity to recover in our global economy: Zimbabwe can grasp this opportunity too.

During the past six months governments have intervened massively in the financial and real sectors of their economies, reviving debate over policies long considered vanquished. Some governments have turned to protectionism, raising tariffs and other barriers to trade. Others are subsidizing industries or more quietly finessing regulatory policies to advantage domestic "champions." Surely, the temptation to placate powerful domestic interests will lead other governments toward protectionism in the months ahead.

A sense of foreboding seems to have enveloped the trade policy community, where a common view among scholars, economists, and journalists is that a resurgence of protectionism is inevitable, and that it will cause serious economic damage. In the newspaper columns and in the think tank reports, there is little evidence of any faith that the rules-based system of trade-established in part for the purpose of containing and defusing protectionist outbursts-is equipped to rise to what is arguably the first major challenge in its 62-year existence.

But that view does not adequately reflect the fact that most governments prefer policies that keep their economies open to trade and investment. Despite some episodes of backsliding, the world is unlikely to witness a significant departure from the trend toward trade and investment liberalization that has been evident since the end of World War II. An increasing number of governments have come to recognize that optimal economic outcomes arise under conditions where policies enhance-rather than limit-the freedom of people to transact with others, including foreigners. Protectionism limits choices and thereby undermines human liberty and economic efficiency.

Reasonably well-respected trade rules and the reality of a global economic system that renders trade openness an imperative for success are some of the reasons to believe that any protectionist outbreak will be fleeting. Indeed, policymakers would be advised to respond to the downturn by reducing their trade and investment barriers unilaterally because doing so expands choices, reduces costs, and spurs the kinds of structural reforms that facilitate economic growth.

A System to Bend but Not Break

One of the reasons for the creation of the rules-based system of trade was to ensure that the scenario of spiraling, retaliatory protectionism of the 1930s never played out again. Starting with the General Agreement on Tariffs an Trade in 1947, through seven subsequent multilateral rounds of trade liberalization culminating in the establishment of the World Trade Organization in 1995, and into the present, that objective has been upheld.

The WTO/GATT rules encourage trade liberalization, but also grant governments some flexibility to manage their own paces of liberalization and to re-impose or raise barriers under certain circumstances. The rules distinguish between "Bound" and "Applied" tariff rates. The bound rate is the maximum rate of duty (per product category) that a member can assess against imports, and the applied rate is the prevailing rate of duty (per product category). Generally, the bound rates of developed countries are significantly lower than the bound rates of developing countries. That is, the highest allowable tariffs in richer countries are much lower than the highest allowable tariffs in poorer countries.¹

Within the rules, developing country economies are considered more vulnerable to potentially disruptive effects of rapid changes brought about by increased trade and investment. Accordingly, governments of developing countries are afforded greater latitude to respond to those changes. How much latitude depends, to some extent, on the differences between each country's bound and applied rates. If the applied rate relative to the bound rate is low, then there may be vast room for backsliding and raising tariffs in response to a perceived crisis. For many developing countries, the differences are vast.

India's simple average bound tariff rate is 50.2 percent, but its simple average applied rate is 14.5 percent. Thus, the Indian government could almost quadruple its tariffs without violating its WTO obligations. Likewise, Brazil has a lot of "overhang" with an average bound rate of 31.4 percent and an average applied rate of 12.2 percent. By contrast, China has far less latitude for backsliding. Its average bound rate is 10.0 percent, and its average applied rate is 9.9 percent. The institutional restraint on China's backsliding is similar to that on developed countries. The bound and applied rates of the United States are both 3.5 percent, and for the European Union (27) the bound rate is 5.4 percent and the applied is 5.2 percent.² Many factors affect a member's bound rates, including its level of development, its duration as a member of the WTO/GATT, and its past negotiating positions, to name a few.³

Other forms of temporary backsliding also are permitted within the system. Members can raise tariffs in excess of their bound rates, impose quotas, and even ban imports altogether under various WTO agreements. The Agreement on Safeguards permits members to impose duties or quotas in response to unforeseen import surges, which seriously injure a domestic industry. Under the Anti-dumping Agreement, duties can be imposed when a domestic industry is materially injured by reason of imports that have been sold at prices below "normal value."⁴ The Agreement on Subsidies and Countervailing Measures permits members to impose duties to offset the injurious effects on a domestic industry from imports that benefit from foreign government subsidies.

Under the rules, imports also can be banned in the interest of public health or safety. Some member countries have used these provisions to exclude imports of beef that were suspected of contamination from "mad cow" disease. Others have banned genetically modified agricultural products on the grounds that the risks of consumption are presently unknown.

Protectionism on the Rise?

C. Fred Bergsten of the Peterson Institute for International Economics finds that "The WTO rules are very porous. If you simply say live up to your rules, you still have massive scope for what I call legal protectionism."⁵ But Bergsten sees the glass as half empty. Sure, there is scope for backsliding, but without that scope in the first place the WTO/GATT system likely never would have come to succeed as it has. Governments would have been less willing to formalize commitments and the scope of rules coverage would have been smaller in terms of products and countries involved.

Still even more importantly, the trade rules are not so restrictive that governments obsess over finding ways around them. It is not the existence of the rules that compels countries to liberalize trade. Governments typically are not looking for excuses to raise trade barriers. If compliance were the primary motivation for countries to liberalize trade, we would not observe applied tariff rates that are so much lower than the maximum allowable rates. And we would likely observe much greater use of the various trade remedies across industries and more invocation of restrictions in the name of health and other technical barriers to trade.

Trade liberalization is motivated by self-interest, and the disparities between bound and applied rates are explained by the fact that most members have a preference for openness. There are real benefits, beyond the reciprocal openings of others' markets, to keeping one's own trade barriers low. Nevertheless, governments have been invoking protectionist measures over the past several months. Here are just a few examples:⁶

• In India, tariffs and other restrictions have been raised on some steel products;
• Ecuador raised tariffs on 940 different products by a range of 5 to 20 percentage points;
• Indonesia limited the number of points of entry into domestic commerce for imported products and is requiring its civil servants to buy only Indonesianmade products; and
• Argentina made licensing requirements more onerous for so-called sensitive products, such as auto parts, textiles, TVs, and shoes.

And here is how a top-circulation American daily newspaper described the global flirtation with trade barriers in December:

Moving to shield battered domestic manufacturers from foreign imports, Indonesia is slapping restrictions on at least 500 products this month, demanding special licenses and new fees on imports. Russia is hiking tariffs on imported cars, poultry and pork. France is launching a state fund to protect French companies from foreign takeovers. Officials in Argentina and Brazil are seeking to raise tariffs on products from imported wine and textiles to leather goods and peaches.⁷

There may be nothing necessarily incorrect about the facts reported. But the tone and implications are possibly misleading. It is hard to accept the otherwise marginally significant facts without also accepting the provocative metaphors and sense of impending doom. Those actions have less antagonistic explanations and more benign interpretations.

The actions of Indonesia, Argentina, and Brazil are consistent with their rights under the WTO agreements and will have a negligible collective impact on world trade. Russia is not even a member of the WTO and frequently behaves outside of international norms, so its actions have very limited representative value. And France has intervened to block foreign takeovers of French companies on other occasions this decade, so its actions are not particularly noteworthy. The popular media usually lacks nuance in its accounting of trade policy events and often intones that the present will be a replay of the 1930s.

A Little Perspective, Please

Although some governments will dabble in some degree of protectionism, the combination of a sturdy rules-based system of trade and the economic self interest in being open to participation in the global economy will limit the risk of a protectionist pandemic. According to recent estimates from the International Food Policy Research Institute, if all WTO members were to raise all of their applied tariffs to the maximum bound rates, the average global rate of duty would double and the value of global trade would decline by 7.7 percent over five years.⁸ That would be a substantial decline relative to the 5.5 percent annual rate of trade growth experienced this decade.⁹

But, to put that 7.7 percent decline in historical perspective, the value of global trade declined by 66 percent between 1929 and 1934, a period mostly in the wake of Smoot Hawley's passage in 1930.¹⁰ So the potential downside today from what Bergsten calls "legal protectionism" is actually not that "massive," even if all WTO members raised all of their tariffs to the highest permissible rates.

If most developing countries raised their tariffs to their bound rates, there would be an adverse impact on the countries that raise barriers and on their most important trade partners. But most developing countries that have room to backslide (i.e., not China) are not major importers, and thus the impact on global trade flows would not be that significant. OECD countries and China account for the top twothirds of global import value.¹¹ Backsliding from India, Indonesia, and Argentina (who collectively account for 2.4 percent of global imports) is not going to be the spark that ignites a global trade war. Nevertheless, governments are keenly aware of the events that transpired in the 1930s, and have made various pledges to avoid protectionist measures in combating the current economic situation.

In the United States, after President Obama publicly registered his concern that the "Buy American" provision in the American Recovery and Reinvestment Act might be perceived as protectionist or could incite a trade war, Congress agreed to revise the legislation to stipulate that the Buy American provision "be applied in a manner consistent with United States obligations under international agreements." In early February, China's vice commerce minister, Jiang Zengwei, announced that China would not include "Buy China" provisions in its own $586 billion stimulus bill.¹²

But even more promising than pledges to avoid trade provocations are actions taken to reduce existing trade barriers. In an effort to "reduce business operating costs, attract and retain foreign investment, raise business productivity, and provide consumers a greater variety and better quality of goods and services at competitive prices," the Mexican government initiated a plan in January to unilaterally reduce tariffs on about 70 percent of the items on its tariff schedule. Those 8,000 items, comprising 20 different industrial sectors, accounted for about half of all Mexican import value in 2007. When the final phase of the plan is implemented on January 1, 2013, the average industrial tariff rate in Mexico will have fallen from 10.4 percent to 4.3 percent.¹³

And Mexico is not alone. In February, the Brazilian government suspended tariffs entirely on some capital goods imports and reduced to 2 percent duties on a wide variety of machinery and other capital equipment, and on communications and information technology products.¹⁴ That decision came on the heels of late-January decision in Brazil to scrap plans for an import licensing program that would have affected 60 percent of the county's imports.¹⁵

Meanwhile, on February 27, a new free trade agreement was signed between Australia, New Zealand, and the 10 member countries of the Association of Southeast Asian Nations to reduce and ultimately eliminate tariffs on 96 percent of all goods by 2020.

While the media and members of the trade policy community fixate on how various protectionist measures around the world might foreshadow a plunge into the abyss, there is plenty of evidence that governments remain interested in removing barriers to trade. Despite the occasional temptation to indulge discredited policies, there is a growing body of institutional knowledge that when people are free to engage in commerce with one another as they choose, regardless of the nationality or location of the other parties, they can leverage that freedom to accomplish economic outcomes far more impressive than when governments attempt to limit choices through policy constraints.

A Growing Constituency for Freer Trade

The WTO/GATT system was created in the first place to deter a protectionist pandemic triggered by global economic contraction. It was created to deal with the very situation that is at hand. But in today's integrated global economy, those rules are not the only incentives to keep trade barriers in check. With the advent and proliferation of transnational supply chains, cross-border direct investment, multinational joint ventures, and equity tie-ups, the "Us versus Them" characterization of world commerce no longer applies.

Most WTO members are happy to lower tariffs because imports provide consumers with lower prices and greater variety, which incentivizes local business to improve quality and productivity, which is crucial to increasing living standards. Moreover, many local economies now rely upon access to imported raw materials, components, and capital equipment for their own value-added activities. To improve chances to attract investment and talent in a world where capital (physical, financial, and human) is increasingly mobile, countries must maintain policies that create a stable business climate with limited administrative, logistical, and physical obstacles.

The experience of India is instructive. Prior to reforms beginning in the 1990s, India's economy was virtually closed. The average tariff rate on intermediate goods in 1985 was nearly 150 percent. By 1997 the rate had been reduced to 30 percent. As trade barriers were reduced, imports of intermediate goods more than doubled. The tariff reductions caused prices to fall and Indian industry suddenly had access to components and materials it could not import previously. That access enabled Indian manufacturers to cut costs and use the savings to invest in new product lines, which was a process that played a crucial role in the overall growth of the Indian economy.¹⁶

India's approach has been common in the developing world, where most comprehensive trade reforms during the past quarter century have been undertaken unilaterally, without any external pressure, because governments recognized that structural reforms were in their country's interest. According to the World Bank, between 1983 and 2003, developing countries reduced their weighted average tariffs by almost 21 percentage points (from 29.9 percent to 9.3 percent) and unilateral reforms accounted for 66 percent of those cuts.¹⁷

The Indispensible Nation

The United States accounts for the highest percentage of world trade and has the world's largest economy. The WTO/GATT system is a U.S.-inspired and U.S.-shaped institution. Recession in the United States has triggered a cascade of economic contractions around the world, particularly in export-dependent economies. Needless to say, U.S. trade policy is closely and nervously observed in other countries.

But despite the occasional anti-trade rhetoric of the Democratic Congress and the protectionist-sounding campaign pledges of President Obama, the United States is unlikely to alter its strong commitment to the global trading system. There is simply too much at stake. Like businesses in other countries, U.S. businesses have become increasingly reliant on transnational supply chains. Over 55 percent of U.S. import value in 2007 was of intermediate goods, which indicates that U.S. producers depend highly on imported materials, components, and capital equipment. And there is also the fact that 95 percent of the world's population lives outside of the United States, so an open trade policy is an example to uphold.

Finally, the President has made it a priority to restore squandered U.S. credibility with the international community. That objective cannot be fulfilled by acting in a multilateral, internationalist manner on foreign policy, while acting in a provocative or unilateralist manner on trade policy because, for most countries, U.S. trade openness and engagement is the form of diplomacy that matters most. Accordingly, the president will have to thwart the Congress's sometimes combative, unilateralist tendencies on trade policy if he hopes to restore U.S. foreign policy credibility.

Conclusion

Despite the global economic contraction and the occasional protectionist indulgence, there is reason to be hopefulthat retrogressive policies will be marginal, short-lived, and ultimately rejected. The absence of trade rules in the 1930s meant that there were no proffered courses of action, no sources of adjudication or remediation, and no generally accepted limits to the actions governments could take in response to external economic policies. And there were far fewer domestic constituencies of any political consequence advocating against protectionism in the '30s. Consequently, there were no proven stopgaps to prevent the pandemic of spiraling protectionism that erupted and exacerbated the global recession.

Today we have the benefit of understanding the consequences of the actions taken in the 1930s. Although that understanding does not guarantee avoidance of past mistakes, we also have solid institutions and incentives to help steer policymakers away from the abyss. The rules governing more than 60 years of trade liberalization have fostered greater certainty and stability, and thus more investment, trade, and economic growth. And today, the commercial and political appeal of protectionism is considerably diminished because most countries have established domestic constituencies that depend on a trade and investment environment that is open in both directions.

Notes

¹ World Tariff Profiles 2008, World Trade Organization (Switzerland: 2008).

² Ibid.

³ See ibid. for references to tariff rates. China's relatively rigid situation stems from the fact of its late accession to the WTO, in 2001. It had to appease the wishes of many more established members to win approval for its own membership, whereas India's relatively flexible situation owes to its longer standing membership and its participation in previous negotiating rounds.

⁴ For a detailed analysis of antidumping rules, see Brink Lindsey and Dan Ikenson, "Antidumping 101: The Devilish Details of 'Unfair Trade' Law," Cato Institute Trade Policy Analysis no. 20, November 26, 2002.

⁵ Steven Mufson, "WTO Seeks to Curtail Protectionist Measures," Washington Post, February 6, 2009, p. D03.

⁶ "Report to the Trade Policy Review Board from the Director-General on the Financial and Economic Crisis and Trade-Related Developments," World Trade Organization, Document no. JOB(09)/2, January 26, 2009.

⁷ Anthony Faiola and Glenn Kessler, "Trade Barriers Toughen with Global Slump," Washington Post, December 22, 2008, p. 1. Emphasis added.

⁸ Antoine Bouet and David Laborde, "The Potential Cost of a Failed Doha Round," International Food Policy Research Institute Issue Brief 56, December 2008, http://www.ifpri.org/pubs/ib/ib56.pdf.

⁹ World Trade Organization statistics, http://www.wto.org/english/res_e/statis_e/its2008_e/section1_e/i01.xls.

¹⁰ U.S. Department of State, "Smoot-Hawley Tariff," description provided at http://future.state.gov/when/timeline/1921_ timeline/smoot_tariff.html.

¹¹ World Trade Organization, International Trade Statistics, 2008, data downloaded from http://stat.wto.org/Home/WSDB Home.aspx?Language=E.

¹² United Press International, "China Rejects 'Buy China' Policy," February 9, 2009.

¹³ Government of Mexico, Economic Secretary, "Mexico Launches a Phase Down Plan to Reduce Import Rates," NAFTA Works (A Monthly Newsletter on NAFTA and Related Issues), http://www.naftamexico.net/naftaworks/nw2009/Jan09.pdf.

¹⁴ Government of Brazil, Brazilian Foreign Trade Chamber (CAMEX), Official Gazette, Resolution nos. 4 and 5, February 4, 2009.

¹⁵ "In Response to International Pressure, Brazil Cuts Import Restrictions," Latin American Herald Tribune, January 30, 2009.

¹⁶ Vidya Mahambare, "Trade Protectionism Cannot Fight Economic Crisis," Rediff.Com, December 12, 2008.

¹⁷ World Bank, "Global Economic Prospects: Trade, Regionalism, and Development," 2005, p. 42.

The results of the market reforms are notable: between 1991 and 2007, the percentage of households below the poverty line fell from 60 percent to 34.6 percent. However, official figures point to mediocre average annual per capita growth during the period 1992–2007—only 1.9 percent— which is very similar to Latin America's average of 1.6 percent in the same period. But official figures grossly underestimate the performance of the economy because of flawed measurement. In fact, the economy is probably more than 30 percent larger than indicated by the official data. Accordingly, the average per capita growth rate since 1992 has been approximately 5.2 percent per year.

El Salvador still has much to do on its policy agenda. In particular, high crime rates constitute a major hindrance to further growth. This lack of security represents the greatest threat to sustained growth and liberal policies.

Nonetheless, the country is showing the rest of the region how economic freedom can pave the way for development and how globalization offers great opportunities for developing countries that are willing to implement a coherent set of mutually supportive market reforms.

The world will, in the end, reject the deceptive comforts of the protectionist temptress. Yes, India did recently raise tariffs and place other restrictions on some imported steel products, and Ecuador raised tariffs by 5 per cent to 20 per cent on 940 different products. There have been similar actions in other countries and more are likely in the months ahead.

But that kind of "backsliding" is permitted under World Trade Organisation rules. The WTO affords some flexibility to governments to occasionally indulge protectionist pressures, which allows the system to bend rather than break. The risk of such measures causing a perceptible drop in global trade flows is remote.

According to recent estimates from the International Food Policy Research Institute, if all WTO members raised all tariffs to their maximum allowable rates, the value of global trade would fall by 7.7 per cent over five years. That's a substantial decline from the 5.5 per cent yearly rate of growth during this decade, and would be quite painful.

But, to put matters in perspective, global trade plummeted 66 per cent during the protectionist pandemic in the first half of the 1930s. The absence of rules in the 1930s meant that there were no proffered courses of action, no sources of adjudication or remediation, and no limits to the actions governments could take in response to external economic policies. Today, we have rules and respected institutions that have worked reasonably well to ensure the integrity of the trading system. Nearly 400 disputes have been resolved successfully during the 14-year history of the WTO, and there have been no trade wars.

In the 1930s, there were far fewer domestic constituencies advocating against protectionism. Today, there are burgeoning interests in a diversity of countries who favour lower tariffs because their livelihoods depend on access to imported raw materials, components and capital equipment. The fact that most WTO members' tariffs are well below their maximum allowable rates suggests that something besides the rules compels openness to trade.

Perhaps it has something to do with the fact that trade barriers are costly to the country imposing them. Higher prices, fewer choices, lowerquality goods and services, and the absence of competition to motivate local business have always been ingredients of economic stagnation. But the proliferation of transnational production, cross-border investment, multinational joint ventures, and equity tie-ups has rendered the "us versus them" characterisation of global competition less applicable.

Global commerce is less "our" producers competing against "their" producers as it is a competition between global supply chains to produce and deliver products in multiple countries. The most successful supply chains encounter the fewest frictions – physical and administrative, including trade barriers.

While "Buy American" proponents perpetuate the myth that imports have destroyed US jobs, there is astrong correlation between imports and job growth, and between imports and economic growth.

That dynamic is easier to appreciate when one considers that 55 per cent of all US import value in 2007 consisted of raw materials, intermediate goods and capital equipment – the kinds of products the construction and manufacturing sectors purchase. Put in this light, it is more obvious that tariffs raise the costs of production, which undermines economic growth – or, as in the current case, economic recovery.

Although governments might indulge in occasional protectionist trysts in the months ahead, a durable commitment to global engagement will emerge in the end.