The collapse of the World Trade Organization meeting in Cancun, treated with little attention by Wall Street and most of the media, has ominous overtones for the world economy, that make a rerun of the 1930s much more likely. Just as President Hoover ushered in the Great Depression by signing the notorious Smoot-Hawley Tariff in 1930, so this breakdown too, if not quickly reversed, may see a sharp decline in world trade that has ominous implications for the decade ahead.

Sen. Reed Smoot (R-Ut), it’s good to have you back — NOT!

It’s generally agreed by economists both left and right that the Smoot-Hawley tariff was a major contributor to the length and depth of the Great Depression. U.S. tariffs were already extremely high compared to the country’s competitors, while the United States was running a substantial balance of payments surplus and exporting surplus capital to continental Europe and Latin America.

The further increase in tariffs in 1930, combined with the closing of the New York debt market owing to the confidence effects of the stock market crash, was sufficient to prevent Europe and Latin America servicing their debts, cause the bankruptcy in 1931 of the Austrian Creditanstalt and the German Darmstadter Bank, and lead the world into depression, the rise of Adolf Hitler, and World War II. World trade, as a percentage of gross world product, did not recover to 1914 levels until 1992.

One positive note. The United States is not currently running a trade surplus, far from it!

Of course, nothing in international negotiations is final; the collapse of the Cancun talks is not equivalent to the Serbian rejection of the Austrian ultimatum in July 1914, and it is possible that a series of bilateral meetings over the next year will restore the world trade system to its previous state of grudging functionality. But I shouldn’t count on it.

The breakdown of the Cancun talks has always been an odds-on probability since the extraordinary decision by the Bush administration in 2002 to reverse the sensible reforms of 1996 and increase U.S. farm subsidies by more than $100 billion over the next 10 years. The European Union, too, which has even larger farm subsidies than the U.S., and instead of destroying surplus crops exports them at rock-bottom prices to third parties, thus wrecking the international market, also decided in 2002 to extend its farm subsidy program at least until 2013, thus putting it well beyond the time horizon of current negotiations. Since farm products (including non-food products like cotton, which played an important role in the breakdown) are the principal export sector of most of the developing world, reform of U.S. and EU agricultural programs was the most important item on the agenda of the “emerging market” group of 21 African, Asian, and Latin American countries led by Brazil, and the develop

ing world generally. According to my colleague Ian Campbell, reporting from the Cancun meetings, agricultural subsidies were not even discussed at the plenary meetings, although of course they had been on the preliminary agenda.

It may be felt that the developing nations, by objecting so strongly to the lack of progress on agriculture that they walked out of the talks, are impugning the good faith of the U.S. and the EU.

Well, they have reason to. Apart from agriculture, the most important export sector for most developing countries is textiles, and clothing made from textiles — after all, the textile and clothing businesses are classic low capital-intensity, high labor-intensity businesses into which such countries naturally gravitate. However, in this area, the U.S. and EU don’t simply impose tariffs against imports, they operate a quota system, of quantitative limits to imports from Third World Countries. As any good economist will tell you, a quota acts at the margin as an infinite tariff; growth in the suppliers’ business is limited absolutely to the amount it can export through the quota barriers. In a number of countries, such as Pakistan, where textiles form a high percentage of exports, development of the economy has accordingly been artificially stunted, to the impoverishment of the local population.

The Uruguay Round of trade talks, which ended to so much fanfare in 1994, reduced a number of tariffs by small percentages, but was supposed to lift textile quotas altogether. However, the lifting of textile quotas was put an absurdly long distance ahead, on 1st January, 2005, so still, nine years after completion of the Uruguay round, the most important benefit to the developing world from those talks hasn’t yet happened. Naturally, developing countries are concerned that, with elections both in the U.S. and for the European Parliament due in 2004, the lifting of quotas will never actually happen, or that if it does, the quotas will immediately be replaced by punitively high, artificially calculated “antidumping duties.”

Unsurprisingly, until the developing world sees its most important tangible benefit from the last round of trade talks fall into place, or any progress whatever made on allowing market access for its most important export sector, there is no enthusiasm for making concessions in other areas, however elegantly the United States and EU may plead for them.

Of course, the developing world is itself absurdly protectionist in a number of areas. India still has an average tariff rate of 35 percent; if as seems likely the country genuinely wants to grow up and play with the big boys, that will have to go. Many developing countries offer appallingly poor levels of security for foreign investment, which some of them think of as a gravy train to be milked for all it’s worth, and not permitted to earn an adequate return. This is particularly a disease in Latin America, in spite of the relatively high wealth and international trade levels of many Latin American countries.

However, while I am strongly opposed to “unilateral disarmament” tariff cuts, of the kind that wreaked long term havoc on the British economy after the 1846 Repeal of the Corn Laws, there is no doubt that lower tariffs, and in particular the absence of absolute barriers such as quotas, are essential to the rapid expansion of world trade, which itself is essential to the rapid expansion of the world economy. Furthermore, in order to get a gradual reduction in tariffs (particularly between Third World countries themselves) and prevent the erection under domestic political pressure of ever more damaging tariff walls and indeed absolute restrictions (such as the United States’ textile quotas and Section 301 anti-dumping duties), we need the World Trade Organization, to police the system, and we need a regular system of world trade negotiations, to remove existing barriers and stamp on new ones.

Those world trade negotiations must be led by the natural leaders, the United States and (if it wants to be taken seriously as a world force) the EU, and in this case their leadership has failed lamentably. This is not wholly a criticism of the Bush administration; it must be remembered that the Clinton administration in 1999 collaborated in the grotesque spectacle of the Seattle trade talks, in which wholly unrepresentative demonstrators were allowed to impose their unwashed agenda on the world trade system, with the avid connivance of the international media. Compared to the Seattle fiasco, the breakdown of the Cancun talks was at least reasonably dignified.

Before readers, remembering their happy innocent days of student demonstrations and rock-throwing, violently protest the last sentence I must re-iterate: the demonstrators are largely representative of protectionist lobbies in the advanced countries, such as the AFL-CIO and the extreme environmentalists. They neither represent the developing world, nor do they have its welfare truly at heart — their agenda, of increased trade barriers and hostility to multinational companies, would impoverish the developing world still further. (The most reliable sign that a Third World economy is finally conquering the problem of poverty is the emergence of its own multinational companies, such as the Korean chaebol, the Russian oil multinationals, and the Indian software and pharmaceutical giants.) Autarky such as is proposed by the demonstrators would mire Third World countries in perpetual poverty — it is precisely the reverse of the trade regime they need to succeed. By giving the demonst

rators air time, and not exposing their protectionist sources of funding and their lack of representativeness, the media itself bears a great share of the responsibility for the breakdown of talks, both in Seattle and Cancun.

So what now? The U.S. and EU appear committed to a series of bilateral negotiations with their hinterlands. For the U.S., the hinterland consists of Latin America, a continent that has shown itself consistently hostile to the U.S. and to any reasonable economic growth model. In the case of Europe, the immediate hinterland of Eastern Europe is much more promising, although its absorption into the EU will be hugely expensive. But bilateral deals with Latin America and Eastern Europe do not improve trade relations with China, India, and the developing countries that are growing economically, which is where lies much of the future of the world economy, and nearly all of its growth.

The big losers from all this? Countries heavily committed to international trade, in particular Britain, Japan, probably China, South Korea and South East Asia.

The moderate losers (nearly everybody will lose something, for world economic output is VERY heavily dependent on trade): Countries that are largely self-sufficient, such as India, the United States and Latin America. African countries that are truly impoverished will remain so; their ability to “bootstrap” themselves out of destitution will however be severely impaired.

The winners (they hope): France and Germany, the Axis of Weasels, who as I wrote six months ago are seriously threatened by the globalization project, and have now managed to derail it. Their living standards will also decline, but they won’t have to make the painful changes in social programs which they are resisting so strongly.

Finally, the wild card. In the battle against terrorism, one of the few things that is clear is that countries with huge excess populations and economies that don’t work, particularly in the Islamic world, are fertile recruiting grounds for terrorists, although leadership and funding may come from their wealthier neighbors.

Indonesia and Pakistan, with a population between them of 350 million, have just been sent a message by the West: don’t call us, we’ll call you.

They may be in touch, in ways we won’t like, quite soon.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.