Protectionism Is Gaining Popularity
The protectionist challenge is evident. The push for tariffs and other means to restrain trade has intensified in the United States and across the world. It would be a dangerous trend under any circumstance, for little in economic history is so clear as the ill effects of protectionist policies. But the danger is that much greater now, given the need (described earlier in this series) for increased trade as a means to relieve demographic strains.
To be sure, the growing protectionist sentiment is understandable. The once great promise of globalization has shown a dark side that has turned a once enthusiast public into one skeptical at best and, in many cases, openly hostile. Firms have closed or moved abroad, and people have lost their jobs, most especially in the simpler, labor-intensive industries, such as textiles, toy manufacture, call centers, assemblies of every kind—from cars to computers—the kinds of effort where the low wages of the emerging economies offer either an irresistible competition or an irresistible temptation to outsource or offshore. Because the domestic losses have occurred in lower-wage areas, globalization has taken much of the blame for the growing and troubling gap between rich and poor in the United States. The attendant public sympathy has inevitably inspired political rhetoric and action, much with no thought to unintended consequences.1
It would take pages to itemize every example of protectionist rhetoric and policy to emerge in the United States lately, much less across the globe. Even a summary makes an unwieldy list, though perhaps just a few examples can suffice. It was noteworthy, for instance, how during the 2008 Democratic primaries, Hillary Clinton and Barack Obama competed actively for which candidates could talk "tougher" on trade. Obama actually elicited complaints from Canada and Mexico by pledging to renegotiate the North American Free Trade Agreement (NAFTA), while Clinton called for a "time out" on new trade deals.2Nor is the protectionist sentiment reserved for Democrats. Surveys of elected Republicans show strong skepticism about the benefits of free trade.3Senators Chuck Schumer (D-NY) and Lindsey Graham (R-SC) make an unlikely pair, but more than once they have joined to call for high tariffs on Chinese imports to punish Beijing for what they believe is a form of Chinese protectionism. Their proposal once got the backing of 67 out of 100 senators.4Nor is this sentiment exclusive to the United States. The World Trade Organization's (WTO) so-called Doha Round of trade liberalization negotiations has all but failed. Protectionist policies have gained currency across Europe, in China, and elsewhere.5
Protectionist policies and proposals come in a variety of shapes and sizes. They include tariffs, subsidies, buy-local rules, restrictions on borrowing and lending, environmental and labor rules, and agricultural supports. They all aim, however, to do one thing: block international trade and money flows.6They are dangerous in whatever form they take. Clearly, any such restrictions, by cutting the country off from foreign product, will (as earlier numbers in this series noted) prevent a nation from relieving the strains of an aging population through access to the output of foreign labor. But even were the country not under this particular demographic pressure, history shows that trade restrictions would do plenty of harm anyway.
At the very least, they would raise the cost of living for the average American. The only reason imports are a threat is because they cost less than the domestic equivalent. By cutting off this flow of inexpensive product to the population at large, protectionists effectively would reduce the real buying power of American incomes. Analysis shows that trade has at times held back increases in the general cost of living by two or more percentage points in a year.7It may seem a small price to pay to save jobs. After all, the hardship to consumers is diffused through the general population, while the pain of those losing jobs to imports is acute. No doubt such differences in intensity explain why politicians and public sympathy find protectionism so tempting. But once protectionist policies are implemented, the loss of these general benefits would become painfully obvious, as it has in the past, along with other ill effects. Probably the ultimate example lies in the history of the Smoot-Hawley Tariffs imposed during the Great Depression.
After the stock market crash of 1929, Senator Reid Smoot (R-UT) and Representative Willis Hawley (R-OR) set out to save American jobs by keeping out imports. They raised tariffs on 20,000 items by an average of 20%.8The legislation hurt immediately by keeping out lower-cost goods and consequently raising the living expenses of an otherwise beleaguered working population. The resulting retaliations compounded the economic harm. International commentary at the time identified this legislation as cause of an "outburst of tariff making."9Ultimately, world trade fell 67%. The United States, which in those days was an export-dependent economy, saw its exports fall 75%, even as its imports fell 40%.10There is some dispute among professional economists whether Smoot-Hawley turned a deep recession into the Great Depression, but all agree it contributed mightily to the misery. There is even evidence that the legislation cut off a nascent recovery. Business in early 1930 seemed to be recovering from the effects of the 1929 market crash. Unemployment had fallen, from 9% in January of that year to 6.3% by June. After President Herbert Hoover signed the tariffs into law on June 17, 1930, however, the gains reversed. The stock market anticipated the ill effects, declining 10% on the afternoon of the signing.11
Though much has changed since the 1930s, this dismal record is still applicable. Certainly, the loss of inexpensive imports cannot help but cut the average American's buying power. And equally as certainly, the rest of the world would retaliate, as it did 84 years ago. When, for instance, the United States blocked Mexican trucks at the border, despite NAFTA rules, Mexico City placed tariffs of between 10% and 45% on 89 American products, until Washington relented.12The buy-American provisions of Washington's 2009 stimulus bill elicited complaints and threats from Canada, Europe, and Asian trading partners.13When Washington imposed a 35% tariff on Chinese tires, Beijing immediately imposed comparable tariffs on U.S.-made auto parts and agricultural products. More, it threatened to sell its vast holdings of U.S. government bonds and warned American firms operating in China that they would face reprisals if they could not get Washington to relent.14This is a partial list, to say the least. Such tit-for-tat protectionist actions are on the rise across the globe.15
Leadership
If the United States wants to use trade to relieve the effect of its demographic reality—and it needs to do so—the country's leadership will have to find ways to counter these protectionist trends, both at home and abroad. That will require global leadership from a Washington that has shrunk from it in recent years. Enlightened and determined American leadership may, in fact, be the only way to overcome the protectionist temptation and its potential to cause so much economic harm, especially in the demographically pressured future. In a different world, the United Nations might lead such an effort, or the WTO, but in reality neither of these organizations has the influence or the power to do the job. Nor does the European Union, especially in its current crisis, nor Japan, though both these regions have powerful interests in promoting free trade as well, for they face even more intense demographic pressure from aging populations than does the United States. China, too, for all its growing stature, doesn't have the diplomatic reach and its markets are not open enough to play such a role.
For Washington to lead, it would have to change its recent direction. Difficult as change is, current and future American leadership at least has the example of the not so distant past to guide it. Whereas these days, Washington jockeys for partisan position and threatens its own trade restraints, the government—from the end of the Second World War until the 1990s—steadily pursued the kind of multilateral free-trade agenda that the world now needs to cope with its demographic imperatives. During those decades, it strived to dismantle trade restraints universally across the entire international community. In the early 1960s, the so-called Dillon Round of trade negotiations got a universal 10% tariff reductions.16The Kennedy Round in the late 1960s and the Tokyo Round in the 1970s made further tariff-cutting strides, and removed other sorts of trade restrictions as well, again universally across the whole trading community.17The picture began to change in earnest in the 1990s. That was when the United States turned from the promotion of free trade generally and began to seek partisan advantage. It was then, too, that Washington began to pursue particularized exclusionary agreements. NAFTA was the first. It included Canada and Mexico, but excluded all others. Washington has proceeded in these ways since, hardly the global perspective it once used and needs now.
To be sure, Washington lacks the relative economic and political power it had in these early years. It can, however, still return to its former policies and exert broad-based free-trade leadership. The first step would require a turn from such exclusionary arrangements—what trade economists call preferential trade agreements (PTAs). This is an area that has received little media attention. Indeed, much of the media treats such preferential arrangements as a step toward free trade. To be sure, they exhibit a more open attitude than a strict form of protectionism, of the sort followed by Smoot-Hawley—but still, they hardly promote broad global trade liberalization. The difference is crucial, as prominent trade theorists have pointed out. Jagdish Bhagwati, for example, has gone so far as to label the recent U.S. approach as that of a "selfish hegemon," echoing the great international economist Charles Kindleberger, who referred to this country's former global efforts as the policy of an "altruistic hegemon."18
Another way Washington, despite its relatively diminished stature, can promote a more global approach is by working through international organizations. Take, for instance, its trade friction with China. Instead of pushing China with threats of tariffs or other punishments, Washington might do better to challenge Beijing within the Group of 20 (G20), which adds 16 of the world's leading trading nations to the Group of 8 (G8) major developed economies. Many of the G20's members, the Europeans especially, object to Beijing's policies, accusing Beijing of managing its currency to give China's producers an export edge on global markets. If the United States could work with Europe, Japan, India, Indonesia, and others at the G20 who have their own reservations about Chinese policy, it might well do more to move Beijing than has the trade belligerence Washington has shown for the last couple of decades.19
Alternatively or additionally, the United States could pressure China, or other nations that pursue unfair trade practices, through other international bodies. The International Monetary Fund (IMF) is one. Washington could, for instance, promote the new rules proposed by IMF staff to thwart currency manipulation, such as many accuse China of doing. These would forbid any nation to buy another's bonds or other liabilities unless it opens its financial markets.20To date, Washington has all but ignored this useful device, favoring instead tariff threats as a negotiating tool. To be sure, such positioning may still not move Beijing, but it would make it easier for China's leadership to accommodate. Singular American threats seem only to inflame China's already ridiculously inflated sense of nationalism. In still another way, the United States could pressure China and other uncooperative nations by inducing international bodies to deny these countries the elevations and status they covet until they play by global free trade rules.21
There are no guarantees, however, that such efforts would move Beijing or any other uncooperative nations or promote a more liberal global trade environment. But such approaches, including a turn away from preferential trade agreements, certainly raise the global free-trade agenda to a status it lost decades ago, and needs now. This alternative approach also would carry less risk of trade war than this country's current partisan positioning. At least on that basis, the alternative approaches offer greater assurance that could blunt protectionist sentiment at home and abroad and establish the more liberal global trade environment that this country and others need to help relieve the strains of its aging demographics.
1For a thorough review of the change in public sentiment and in the political response, see Milton Ezrati,Thirty Tomorrows(Thomas Dunne Books/St. Martin's Press; forthcoming April 2014), especially Chapter 8.
2See, for instance, Josh Gerstein, "During Debate, Democrats Talk of NAFTA Withdrawal,"The New York SunFebruary 27, 2008, and James Politi and Edward Luce, "Democrats Tougher Anti-Trade Rhetoric,"Financial Times, May 7, 2008.
3John Harwood, "Republicans Skeptical on Free Trade,"The Wall Street Journal, October 4, 2007.
4Holly Yeager, "Senators Drop Call for Chinese Tariffs After Paulson Meeting,"Financial Times, September 29, 2006.
5For a more extensive and detailed catalogue, see Milton Ezrati,Thirty Tomorrows(Thomas Dunne Books/St. Martin's Press; forthcoming April 2014), Chapter 11.
6Ibid.
7Ibid. (especially chapter 10).
8"Smoot-Hawley Tariff Act," Encyclopedia Britannica website, www.eb.com
9Quoted in Douglas A. Irwin, "The Smoot-Hawley Tariff: A Quantitative Assessment," working paper 5509, National Bureau of Economic Research, March 1996.
10Ibid.
11See Chen Deming, "Protectionism Doesn't Pay,"The Asian Wall Street Journal, February 20, 2009.
12"Mexico Realties," editorial,The Wall Street Journal, March 19, 2009.
13Sarah O'Conner, "U.S. Companies Suffer Repercussions from Buy American Initiatives,"Financial Times, March 17, 2010.
14Keith Bradsher, "Chinese Move to Retaliate Against U.S. Tire Tariff,"The New York Times, September 14, 2009, and Stephanie Kirchfgaessaer, "China Hits Out at U.S. 'Protectionism',"Financial Times, June 6, 2008.
15David Pilling, "Will China's Coke Moment Spark Retaliation?"Financial Times, March 26, 2009.
16Kendal W. Stiles, "The Ambivalent Hegemon: Explaining the 'Lost Decade' in Multilateral Trade Talks, 1948-58,"Review of International Political Economy(Winter 1995).
17Anne O. Krueger, "Prospects for Liberalizing the International Trading System," working paper 2409, National Bureau of Economic Research, October 1987.
18Jagdish Bhagwati, "The Selfish Hegemon Must Offer a New Deal on Trade,"Financial Times, August 20, 2008.
19Thomas Wright, "America Must Find a New China Strategy,"Financial Times, August 9, 2010.
20For a description of this proposal, see Martin Wolf, "How to Fight the Currency with a Stubborn China,"Financial Times, October 6, 2010.
21For a list of such opportunities, see Bob Davis, "Short List of Options for the U.S. on Yuan,"The Wall Street Journal, October 8, 2010.
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