“Spectre of Protectionism”

Sydney M. Williams

Thought of the Day

“Spectre of Protectionism”

October 2, 2012

“When the going gets tough, the tough get going,” says an old adage. But too often, tough economic times bring out the worst in politicians. One pressing example has been the growing talk of protectionism on the part of both political parties. Trade is a sensitive issue. For years, American consumers have benefitted from inexpensive imports. But American manufacturers and especially union representatives, and the politicians who cater to them, see the loss of jobs at home as the fault of lower wages and currency manipulators in emerging markets. Last June, the New York Times reported that the World Trade Organization (WTO) had said that in the previous nine months the Group of 200 economies had added 124 new restrictive measures. Global Trade Alert, in an independent survey, claimed that protectionist measures enacted since 2010 and 2011 had increased 36 percent. And, of course, we all know that Smoot-Hawley did as much to prolong the Depression as any other policy.

A weak economy and an election year combine to bring out the worst in politicians, especially an incumbent who must defend the economy for which he is responsible. Following Mr. Obama’s State of the Union last January, John Carney a senior editor at CNBC wrote: “I cannot remember a President using the State of the Union…to so prominently advocate protectionist policies.” He spoke of tax penalties for company’s off-shoring jobs, subsidies for bringing manufacturing back home and aggressively pursuing trade cases against China – our second largest export market.

Included in the omnibus spending bill of 2009 was a provision that shut down a pilot program allowing Mexican trucks to drive on U.S. highways. In retaliation, Mexico announced its intent to impose tariffs on 90 imports from the U.S. The stimulus bill of 2009 included a “Buy America” provision, later softened but not removed and has served to aggravate a worsening situation. Yesterday, the Wall Street Journal editorialized about a recent decision by the Commerce Department to reconsider a 1996 agreement with Mexico that set a floor on tomato prices to avoid costly and unpredictable dumping disputes. Last year, the U.S. imported $1.8 billion worth of tomatoes from Mexico, giving Americans greater variety and cheaper prices. Now, in a swing state, a few large Florida growers are among 80 U.S. producers that want to abandon the deal. And the President is heeding their call.

Governor Romney has been equally strident in his denunciation of China as an unfair trade partner and as a currency manipulator – an odd comment to come from a country that has been aggressively manipulating its currency for the last several years. Mr. Romney should know better. As the former CEO of Bain Capital, he certainly understands the benefits of free trade and the pitfalls when it is curtailed. In the midst of a campaign, though, candidates will say whatever they think is necessary to gather votes. When world economies perform poorly, political leaders resort to defending domestic interests and passing blame for economic woes onto the dumping practices of other countries. In an environment where acknowledged unemployment is 8.2%, but where the U6 number is 14.7%, politicians resort to scare techniques. If taken seriously, they risk aggravating an already bad situation.

While exports represent about 13% of our GDP, they are far more important for most of our trading partners. Our largest trading partners, in terms of exports are, in order: Canada, Mexico and the European Union. Collectively, exports represent about 30% of their economies. Any protectionist measures will hurt them more than the U.S. Such measures will stall global growth, and will hurt the U.S. Despite central bankers cheapening money around the developed world, economic growth is anemic at best. Unemployment in the Eurozone is 11.4%. Their economy flat-lined in the first quarter and shrank 0.2% in the second. There is little doubt that the region has re-entered recession. China’s manufacturing activity continued to contract in September, with their official purchasing managers’ index improving slightly but remaining below the threshold that divides expansion from contraction. The Shanghai Index is 66% below where it was five years ago.

In this feeble economic environment, export growth has been one of the few bright lights; however, according to the WTO, that light is now dimming. While GDP expanded at about a 3% rate during the Bush years, debt increased at a faster rate, suggesting that much of the growth was debt-induced. In contrast, exports that were 9.5% of GDP in 2002 are now about 13%. The passage of NAFTA in 1994 created the world’s largest free trade area. According to the United States Trade Representative, U.S. goods exported to Canada and Mexico increased 190% between 1993 and 2010 – an annual increase of just under 7%, about double the rate of GDP growth during those years. After long delays, free trade agreements with South Korea and Colombia finally went into effect and it is expected that the agreement with Panama should be operating by year’s end, according to Ron Kirk, U.S. Trade Representative, speaking on Friday.

Nevertheless, the WTO has again lowered its estimate for growth of global trade from 3.7% to 2.5%, and they have reduced their expectations for 2013 from 5.6% to 4.5%. In 2011, world trade expanded at 5%, which in turn was sharply below the 13.8% pace of 2010. This is not a good sign and does not bode well for world economies. Unfortunately, tough economic periods cause governments to retreat to their own shores. Barriers erected will set back trends that have been in place for two decades and which have improved living conditions for millions of people around the globe. In a review in the Economist of Peter Marsh’s new book, The New Industrial Revolution: Consumers, Globalization and the End of Mass Production, it is noted that manufacturers form a giant ecosystem. “A product may be designed in one country and assembled in a second, using components produced in dozens of other countries.” According to Mr. Marsh, the world is on the cusp of another industrial revolution, driven by advances in electronics and biotechnology, and abetted by the internet. Prices tumble, as products proliferate. Erecting barriers to the free exchange of ideas, services and products would serve only to prevent this evolution; it would impoverish designers, manufacturers and assemblers, and would negatively impact consumers.

Eduardo Porter writing last August in the New York Times, wrote of the disconnect between campaign rhetoric and policy. He noted that American’s fear of foreign trade has grown sharply in the last twenty years, as rising globalization has hurt American wages and exposed our vulnerability to an expanding educated class in developing countries. For years, Americans were able to live under an illusion that all was going their way. Productivity improvements and a reasonably strong domestic economy coupled with the collapse of the Soviet Union had placed the United States in an enviable position. The economy kept unemployment relatively low. Easy credit lines allowed people to live beyond their means and a relatively strong currency, low foreign labor costs and cheap commodity prices provided Americans low prices on consumer goods.

Things have changed in the past few years. Economies have worsened and rhetoric is elevated. We better hope that Mr. Porter is correct, that campaign promises do not translate into policy. President Obama was slow to adopt free trade agreements with Colombia, Panama and South Korea and his strong ties to unions may retard development. The move toward protectionism was hastened by the credit crisis of 2008, but the world is changing, as Mr. Marsh notes. We are going to have to learn to compete more effectively. As a nation, we must recognize our strengths and limitations, and be honest about our existing debt obligations. We must encourage the more aspirational among us to compete globally. As a nation of individuals, we must provide entrepreneurs the tools to succeed. We must improve educational standards and be more open to immigration. There is no other answer. We cannot close our borders. We cannot hide within a cocoon. We cannot turn the clock back. Individually, each of us must do better.