Trade protectionism is so bad, but it feels so good.

The U.S. Congress is mulling "Buy American" provisions. Many Canadians, including the federal NDP, are urging a "Buy Canadian" policy in response. In Britain, wildcat strikers are demanding "British jobs for British workers!" Elsewhere in Europe, protectionist sentiment is rising so rapidly the European Union is planning two economic summits in an effort to fend it off.

The world is in recession. International trade is plummeting. The global financial system is a shambles. Is it really possible that at this critical moment national governments would raise barriers to trade -- and risk pushing everything off the cliff?

If humans were a rational species, the answer would certainly be no. After all, we know what put the "Great" in the Great Depression.

It wasn't the stock market crash of 1929 nor the recession that followed. Both the crash and the recession were part of the normal course of things. It was a series of foolish decisions that turned a crisis into a catastrophe.

Among them was the Smoot-Hawley Tariff Act of 1930. Intended to protect American manufacturing and jobs, the Smoot-Hawley tariffs instead sparked a devastating international trade war at the worst possible moment.

Fortunately, this story is notorious. Every politician knows it. And that should ensure that they never make the same mistake again.

Or at least it would if people were rational. But what if we aren't as rational as we think we are?
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Remember: even before Smoot-Hawley was passed, most informed observers knew raising tariffs in the midst of the crisis was tantamount to putting a gun to the head of the American economy and pulling the trigger. More than 1,000 economists signed a petition urging Congress to vote against it. Henry Ford pleaded with President Herbert Hoover to veto it. Thomas Lamont, the chief executive of J.P. Morgan, recalled he "almost went down on my knees to beg Herbert Hoover to veto the asinine Smoot-Hawley tariff."

Still, Congress passed the legislation and Hoover signed it.

At that point, other governments faced a tough choice. They could respond in kind. Or they could refuse to raise trade barriers, while continuing to push the Americans to reconsider their folly.

Standard economic theory says the smart choice is the latter. Raising trade barriers in response to another country's raising of barriers may protect some at home, but it inflicts costs on many. It's a classic example of -- to use one of my mother's favourite phrases -- cutting off your nose to spite your face.

And yet, that's just what country after country did. Canada even launched a pre-emptive strike, raising tariffs before Smoot-Hawley became law. International trade was cut off at the knees. And the rest is dismal history.

The explanation for this insanity lies only partly in economic ignorance. More fundamentally, I think, it's a matter of psychology.

Psychologists and behavioural economists have shown people who believe they have been wronged will seek to punish the wrongdoer even if doing so comes at a cost. In one experiment, Ernst Fehr, an economist in Switzerland, found people who shared money with another party who didn't reciprocate -- the offender walked away with the cash -- willingly gave up more money in order to punish the unco-operative partner. That wasn't a surprise. Other researchers had gotten the same results.
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What made Fehr's experiment novel is that he scanned the brains of participants. His scans revealed that planning and taking revenge on a wrong-doer activated the brain's pleasure centre -- the same site that responds when we have sex, eat delicious food, or smoke opium.

Revenge is deeply satisfying. Doing nothing in response to a perceived wrong is anything but. It's not hard to see how this basic biological fact can influence trade policy.

When a trading partner engages in protectionism of any kind, they violate basic notions of co-operation and reciprocity. Very simply, they appear to do wrong.

How should the wronged party respond? Economic theory says, do nothing. Don't hit back. Shrug it off. It's the rational thing to do.

But our brains are wired to hit back. We want to hurt the other guy, even if it costs us. Rationality be damned.

Of course, revenge isn't the only irrational impulse at work in the current economic crisis. There's also cold fear: Do something, it whispers. Do anything.

"What we are afraid of," an American undersecretary of trade once said about the threat of protectionism, "is that people are so emotional that they will do something that they know is foolish, just to do something."

Fear, revenge, and irrationality: This is the stuff of bad decisions and trade wars.

This is what could push everything off the cliff.

You can contact Dan Gardner at the Ottawa Citizen.
E-mail: dgardner@thecitizen.canwest.com

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