Canada needs to step up to the plate and show the United States that two can play the trade protectionist game, Nobel Prize-winning economist Jagdish Bhagwati says. However, others, including his renowned peer Paul Krugman, say trade protectionism is not a great threat and is actually remarkably low given the depth of the global financial crisis and recession.
"The first thing we have to learn is not to throw the trade baby out with the financial bath water," said Mr. Bhagwati, a professor at Columbia University and the recipient of the Nobel Prize for Economics in 2005.
At the Centre for International Governance Innovation's annual conference in Waterloo, Ont., Mr. Bhagwati said countries, and in particular the United States, were under immense pressure to resort to protectionist policies to protect low-skilled workers.
Mr. Bhagwati said it was up to those such as Canada, to retaliate against protectionist actions in order to push trade liberalization forward.
"Retaliation is the only way to remind countries like the United States not to go down that road," he said.
Despite Mr. Bhagwati's view, Canada has preferred to move down a path of negotiation with its neighbour.
On Saturday, Canadian municipalities backed down from a threat to boycott U.S. goods and services in retaliation for "Buy America'' provisions that were included in the U.S. economic stimulus bill.
The boycott was slated to take effect yesterday before the municipalities announced they were in support of negotiations.
"We are encouraged by the talks now underway between Canadian and U.S. officials, and want to give them the time and space to reach a successful outcome,'' said Basil Stewart, the federation's president and mayor of Summerside, P.E.I.
While Mr. Bhagwati said it was important for countries to forge better avenues for trade in order to boost prosperity and income, he acknowledged that it was very difficult to achieve in a time of crisis and little would happen until economic growth became stronger.
He said while world leaders, including those belonging to the Group of 20 nations, endorsed open trade, pressure from electorates suffering from job losses were preventing governments from acting on their words.
"President Obama can't bring himself to say anything nice on trade," he said. "The unions are so fearful of international trade right now. They think they're going to lose jobs."
Paul Krugman, a former student of Mr. Bhagwati's and last year's recipient of the Nobel Prize for economics, said it was easy to "hyperventilate" in times of crisis over what are "quite small" trade issues. Mr. Krugman, who teaches economics and international affairs at Princeton University, said the "Buy America" policy went against trade principals, but was not a major threat to global trade.
"The Obama administration has not been free trade purists, but they're staying within the law," he told reporters on the sidelines of the CIGI conference.
Craig VanGrasstek of Harvard University's John F. Kennedy School of Government said the United States was being "less protectionist" than it has been in the past. Even so, he said U.S. policy makers had no interest in either trade protectionism or free trade at present.
Mr. VanGrasstek said Barack Obama had mentioned trade in only 1.1% of public speeches since taking office at the beginning of the year. However, this was not unusual and it was possible trade could rise in importance in the years to come. He said U.S. presidents historically did not show any interest in trade until they reached the end of their final term, a period when they generally had the chance to introduce policies that did not have widespread public support.