Free traders cry wolf an awful lot. If the Doha round of world-trade talks hit a snag, trade enthusiasts fret that it is the beginning of the end. A few years ago, an Associated Press reporter wryly observed the overheated rhetoric that appears in public commentary about trade: Rubicons are crossed, crossroads are reached and red zones are breached. When the financial crisis hit a year ago, many were convinced that this was just the beginning of Smoot-Hawley II: The Sequel-and, full disclosure, I was certainly among those who were worrying.
A year after the Lehman collapse, perhaps it should be acknowledged that the global-trading system has held up better than trade enthusiasts would admit. Trade levels have declined, but the global economic contraction is to blame, not protectionism. Anti-dumping actions have skyrocketed, but these affect less than one half of one percent of the total value of imports among the G-20 economies. Back in the spring, the World Bank scolded the G-20 countries for the rise in protectionism and their broken promises on completing the Doha round. At the same time, however, they also acknowledged that the effects of these measures on trade flows have been minimal. Long story short, after a year of recession, the trading system has bent a little, but not broken. And the free traders who have warned about the Great Depression II have lost a small amount of their credibility.
Why do I bring this up? This past Friday, the Obama administration announced the decision to slap a 35 percent tariff on Chinese tire imports. True to form, free traders were incensed. The thing is, they weren't the only ones freaking out-even the financial markets were spooked by the move.
Is this an overreaction? Won't the WTO patch up this dispute about eighteen months from now, just as they did back in 2002, when the supposedly free-trade friendly Bush administration imposed steel tariffs? Maybe we're just having a similar outpouring of alarmism as we did then. The world-trade system took the hit and lived to tell about it.
I want to say yes. I want to believe that the system is pretty robust. Since Obama was inaugurated, I've been resisting the urge to reflexively shout "protectionism." The time to get realistic, alas, may have come.
Obama's tire tariff isn't your everyday sort of protectionism. It could end up causing a serious ripple effect. Due to a loophole in the 2001 agreement that allowed China to join the WTO, if any one member decides to impose safeguards on Chinese imports, all others can follow suit. It doesn't take a genius to see how bad it could get.
As such, this trade dispute could spread more rapidly than most. Furthermore, exercising the safeguard is not a standard anti-dumping case. Its use is simply a reaction to growth in Chinese imports-not an accusation of unfair trade. Protectionists defending Obama's action have pointed out that it's fully legal. This is true-but so is shouting "You Lie!" during a presidential address. That doesn't make it a good idea.
And Obama's actions look all the more pointed because they are directed at specifically China. On the other hand, Bush's steel tariffs, however egregious, targeted a specific economic sector, not another nation. Furthermore, the Bush administration responded to the outcry over their bout of economic nationalism by quickly diluting the tariffs' harshest provisions.
In contrast, the Obama administration isn't trying to save the American tire industry. Because Obama's policy is country-specific, the administration will find it much harder to engage in diplospeak-the tariffs will either be applied against China or they won't. The White House can't backtrack without flip-flopping. Which bodes ill for any concessions or negotiations. This will prove to be a remarkably sticky issue when the G-20 convenes later this month in Pittsburgh.
One could argue that the country-specific nature of Obama's action makes it less protectionist than Bush's measures against steel. If this measure was the end of the story, that would be correct. The problem is that the story will not end here. As previously noted, other countries will seize on the U.S. action to apply their own duties against Chinese goods. And targeting the largest trading partner of the United States is hardly a modest action.