Threat of U.S. Protectionism Hits The News
September 15, 2009
Today’s press attributes yesterday’s firmer dollar and decline in Asian stocks and commodities to fears of a trade war. The role of beggar-thy-neighbor policies in the 1930’s — that is, mutually retaliatory barriers to trade flows — is legendary. Against that backdrop, Beijing’s threat to respond in equal kind to the U.S. 35% tariff on imports of Chinese tires created quite a stir. The lead story In today’s Wall Street Journal claims Obama is in danger of becoming America’s first protectionism president since Hoover, an ironic accusation since candidate Obama frequently compared his predecessor to Hoover. The Financial Times finds fault in Obama’s decision but concludes that the president is too intelligent to allow an escalating trade war and moreover notes that protectionism was not a main cause of the recent severe global recession. Reporter Steve Greenhouse of the New York Times categorizes Obama’s action as a reward to the steelworkers’ union but notes widespread domestic disapproval ranging from the Chamber of Commerce to the renown economist C. Fred Bergsten, who has strong ties to the Democratic Party. Bergsten quotes an aphorism of economists that “you cannot resist backsliding on trade unless you’re moving forward.”
Markets are far from panicking that U.S. commercial policy will ignite a full-fledged trade war and send the global economy back into recession. Stocks are up today, and gold is back above $1000. That being said, I do not consider complaints against Obama’s trade record unfair or exaggerated.
- Like many Democrats, Obama exhibited protectionist predispositions when running for office. In light of the severity of the global recession, which only became apparent at the late stage of the campaign, he ought to have gone out of his way to reassure world concerns that his administration would not be more protectionist than other recent presidencies. Regrettably, he has not done so, thus strengthening doubts about where he stands.
- The most effective form of protectionism is currency depreciation because such boosts the competitiveness of a far greater cross-section of traded goods and services than any single tariff or other commercial restraint. The Obama Administration has been conspicuously silent about recent dollar depreciation, suggesting it welcomes this adjustment.
- As a skilled engineer, former Commerce Secretary, and successful businessman, Hoover was well aware of the risks of a trade war. As the Journal notes, he did not seek a trade war but fell into one accidentally by underestimating its escalating dynamics. The lesson is not to take chances with free trade by pandering to domestic political pressures.
- The promise of free trade is not that every industry and person benefits. There are losers. But there are more winners. And for each economy individually and the world’s economy collectively, the production of goods and services is fostered by reducing artificial commercial barriers and abiding by what economist David Ricardo called the law of comparative advantages. It’s best not to make exceptions outside of those vital to national defense.
- As the world’s largest economy, the United States needs to lead by example. This is hard, when U.S. manufacturing industries succumb to cheaper competition one by one. Protectionism offers false relief. There are other ways to make the economy more competitive.
The marketplace provides the best way to police protectionist excesses. If the present administration wants to stay in power beyond four years, it must progress forward in distancing the United States and world economies from the recent recession. That will not be possible if equities tank all over again. Yesterday highlighted the market dangers if world leaders inadvertently back into an escalating trade conflict. Hopefully, the lesson was observed and learned.
Copyright Larry Greenberg 2009. All rights reserved. No secondary distribution without express permission.
Tags: Dollar
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Great insight into Fujii in Japan. This kind of analysis is unique and invaluable. Larry you are a true pro!