Threat of 1930's-style protectionism looming: Pascal Lamy

The Director General of the World Trade Organization (WTO) Pascal Lamy has warned that the growing currency tensions can lead to the "return of 1930's- style protectionism," said a media report.

"The question is whether this (the anti-protectionist mood) is stable or risks being dented by currency developments. There is a risk and the risk is not nil," Lamy told the Guardian.

Amid fresh evidence that governments are seeking to boost their own economies' growth by manipulating their exchange rates, Pascal Lamy expressed concern that the next step could be the erection of tariff barriers.

He added that the existence of the WTO, the fear of a return to the experience of the 1930s and the increasingly integrated nature of global trade had so far deterred governments from raising barriers to imports.

He, however, warned that the reluctance to use protectionist measures was now being tested.

"A currency war and protectionism were the only two problems, the global economy had not faced during the crisis of the past three years," Lamy said.

Lamy further told the newspaper, "What should be avoided is a domino effect where you get a beggar-my- neighbour, or tit-for-tat chain."

During last week's meeting of the International Monetary Fund in Washington, Lamy said there were different ways in which countries were manipulating their currencies.

Japan and South Korea were intervening directly, Brazil had used controls on capital inflows and, Britain and the US were thinking of pumping in more money into their economies.

In the 1930s, countries used both devaluation and tariffs to insulate themselves from the impact of the Great Depression.

The collapse of the gold standard allowed nations to seek an edge through cheaper exports, which led to retaliation both in the currency markets and through the erection of tariff barriers, the daily said.

The General Agreement on Tariffs and Trade was signed after the Second World War and Lamy said the WTO was studying the Gatt rules to see if they could be used to prevent a new wave of protectionism, the report said.