The New Protectionism

"Where a great number of commodities are raised and perfected for the home-market, there will always be found some which can be exported with advantage. But if our neighbours have no art or cultivation, they cannot take them; because they will have nothing to give in exchange."

--David Hume, Of the Jealousy of Trade

Bush's failures would seem to be harbingers of a new and deeply troubling protectionism in the United States that evokes the mood of the 1930s. In part it comes from the top, from Bush's desire to win votes from steel workers and farmers. But it also comes from below: from workers who are nervous about their jobs and their financial security and from corporations who fear their ability to compete with emerging nations, especially China.

Companies always fear competition. Few company executives are advocates of free trade. They are in the competitive game and, like soccer players, always call on the referee to adjudicate in their favor, however dubious their claim. Workers, for their part, are always anxious to retain their jobs and cannot be expected to see the broader picture. This is why strong and honest leadership is needed. Leaders must see above the fray, the bitter complaints of interest groups and of those who lose out in the battle to compete, and keep their eyes fixed on the greater global good that can be achieved by freer trade.

It is sad that the Bush Administration has not proven principled and upright. Yet its Democratic opponents show every sign of embracing still more wholeheartedly the popular mood of protectionism. Protectionist sentiment has struck a chord among voters and is likely to play a role in the Democrats' election strategy. Even as candidates drop out of the race, their ideas continue to have an impact on the formulation of an electoral agenda.

For example, tapping into popular resentment at inexpensive imports, particularly textiles from China, Democrat candidates for president have castigated the Bush Administration for doing too little, too late to stem the flow. Yet the protectionist approach, while tailored to please American textile workers, is full of hypocrisy. Textiles are relatively simple to design and to manufacture, and thus developing countries can produce them competitively. And, as we have seen, the United States has remained protectionist in the textile sector despite committing more than a decade ago to open its market. It is, in short, neither China nor developing countries that have reneged on agreements and played a dirty game, but the world's biggest economy.

The presumptive nominee, Massachusetts Senator John Kerry, notes that if elected, he would order

"an immediate 120 day review of all existing trade agreements to ensure that our trade partners are living up to their labor and environment obligations and that trade agreements are enforceable and are balanced for America's workers."

Kerry says he "will consider necessary steps if they are not."

Kerry takes the position that "Some nations have consistently violated agreements by the World Trade Organization." Governor Howard Dean espouses a similar line. The United States, it seems, is being deceived by other countries:

"Stemming job losses means vigorously enforcing the terms of existing trade agreements. The Bush Administration . . . has only brought eight trade cases before the WTO, while the Clinton Administration filed twenty-seven WTO actions in its last three years in office. Moreover, the Administration has lost fourteen of the sixteen WTO cases it has defended. This track record means lost American jobs and lost business opportunities. . . . [W]e need an Administration that will stand up for American trade laws."

These recommendations would temporarily save some jobs in uncompetitive firms--at a cost to U.S. consumers and to the detriment of workers overseas--but otherwise assure the prosperity only of some Washington legal firms.

Job losses also come under fire. "The Bush Administration has done nothing to end incentives that encourage manufacturers to move their jobs overseas", Kerry proclaims. He promises that "we should not only get rid of these incentives, but that we should give new tax breaks to companies that stay in the U.S. and create new jobs." In addition, firms that move jobs overseas "should not get government contracts or any other perks or incentives from the government." Senator John Edwards asserts still more strongly that jobs are being stolen from Americans by foreigners while Bush sleeps:

"Under George Bush, America has lost more than 3 million private sector jobs, and 1 million jobs have been lost overseas. Not only are we losing jobs; we are losing high-paying jobs. Outsourcing has affected everyone from call center workers to computer programmers."

What is interesting about this position is that it goes beyond what might be called traditional protectionism: the "give me a tariff barrier, or a quota or a legal restriction" that might be called sufficient for all normal purposes. This attack is essentially on businesses themselves, on their decision to think globally and employ overseas workers rather than American ones.

Should politicians be standing in the way of that sort of decision? Are company executives not free to decide how best to deploy resources around the world in order to compete and be successful? Does America not believe in globalization?

The next level of protectionism involves tying the hands of foreign competitors with red tape. It finds its most extreme expression in the suggestion by a Democrat who, perhaps fortunately, dropped out of the running for the presidential candidacy--Richard Gephardt. His idea is an international minimum wage. To find the right level for a minimum wage in any one country is, of course, challenging; and there is a question mark about whether a minimum wage is a useful guideline at all. But to apply one internationally would be technically and bureaucratically impossible and useful only for one thing: finding grounds on which to block exports to the United States. The proposal, put forward as being principled and oriented to improving workers' remuneration around the world, is at root utterly cynical, an attempt to save jobs here while denying them to workers overseas.

Finally, Kerry tackles the question of exchange rates:

"China, Japan and other nations have purposely kept their currency undervalued relative to the U.S. dollar to promote exports in the United States and undermine U.S. products abroad."

This accusation of deliberately maintaining a weak currency in order to gain a competitive advantage has been frequently made against China in the past year. But in fact the case is difficult to make. The dollar has, of course, plummeted against the euro in the past year and has weakened against the Japanese yen. Asian countries certainly do not want their currencies to appreciate against the dollar and China maintains a fixed rate. But one of the means Japan and other Asian countries have employed to prevent currency appreciation against the dollar has been to buy U.S. government debt.

According to recent U.S. Treasury data, between January and November 2003, foreign holdings of U.S. Treasuries rose by $264 billion. Japan, the major foreign holder of U.S. government debt, increased its holdings by $135 billion (to a total holding in November 2003 of $525.5 billion.) The second largest holder is China, which increased its holdings of Treasury debt by $23.1 billion to $143.8 billion. (By way of comparison, the United Kingdom is the third largest foreign holder, at $111.7 billion.)

Buying U.S. debt in this way helps to recycle bilateral trade surpluses with the United States and helps to prevent further appreciation of the yen against the dollar. But can Japan be blamed by U.S. politicians for buying U.S. government debt and, in effect, financing about half of Bush's huge budget deficit in the past year?

Where China is concerned, what must be taken into account is that Chinese export companies aim to undercut their competitors and do have some flexibility on price. Appreciation of the renminbi might do little to harm their price competitiveness. Moreover, Federal Reserve Chairman Alan Greenspan and others have rightly remarked that if the Chinese currency is being kept undervalued through an accumulation of reserves, then such undervaluation is creating too rapid credit growth. Then the greatest harm done by currency policy will be not to China's competitors but to the Chinese economy.

Above all, what is lacking in the current U.S. view of international trade is a sense of the gains from trade that David Hume laid out so brilliantly 250 years ago. The Chinese economy is one of the few in the world to show strong growth. China exports, but it also has a dynamism of its own, born of the free market reforms initiated by Deng Xiaoping in 1978. A once-communist economy is finding fresh life as free enterprise flows through its veins. This is something in which the United States should rejoice, not lament. For it is certainly true that the America's macroeconomic weaknesses have been exacerbated by the lack of growth in Europe and Japan in recent years. If the European and Japanese economies were more dynamic, U.S. exports would be higher and so would U.S. growth, and the U.S. trade and current account deficits would be lower, thereby reducing the need for foreign capital inflows.

Essay Types: Essay