Unlucky Protectionism

“Protectionism”, if it becomes a widespread practice, will do further damage to the already tumultuous financial situation and none the better for the long-term prospects of a healthy global economy.

As such, “Buy American” must be the choice of the consumer, not the government. Otherwise, capitalism is doomed.

The definition in any given dictionary is pretty much the same, referencing the act of a government to impose restrictions on foreign competition to protect domestic producers against unfair trading policies. It verges on paranoia when one country jumps the gun by instigating tariffs, or subsidizes its own industries, and institutes a stance of nationalism; “me first” puts every citizen’s well-being in last place, regardless the country of origin.

It takes years, even decades, for trading partners to resolve concerns that imports and exports between them will be beneficial to each. One nation may come out on the negative end of the trade balance but that’s when a third, then a forth, fifth and upward numbers of trading partners make the round of economic growth a success for everyone. Will the circle remain unbroken or will it spin out of control in a tornado whirlwind of self-interest?

Addressing trade disputes among nations began shortly after WWII with GATT, the General Agreement on Tariffs and Trades (1947-1994), growing from 23 to 128 countries and resulting in over $500B of tariff concessions… money in the pockets of the working-class.

GATT was intended as a temporary means to promote international trading guidelines.
The International Trade Organization (ITO) was to have been a permanent governance body but Congress deemed it too restrictive to growth with provisions that would dictate rules of employment and international investments, roadblocks to sovereignty.

GATT was maintained as a means for trade negotiations until it evolved into the World Trade Organization (WTO) in 1994. The WTO now has 153 members that represent 95% of world trade.

The WTO condemns protectionist practices but has little influence to resolve disputes since it is a de facto governance whereby it relies on the “honor system” between trading partners rather than by direct fines. If a country is deemed at fault in a dispute, the threat of sanctions from other countries can be a fairly mute point.

Take for instance the recent dispute between the US and China on “intellectual property rights” violations, in particular the piracy of copyrighted music and movies. Although the WTO ruled in favor of the US, the lack of strict Chinese anti-piracy laws will have little impact to restrict continued violations.

To further dilute the effectiveness of the WTO, once a country files a complaint to the Dispute Settlement Body, the appeals process can prolong the resolution for 2 to 3 years, after which there is still a grace period before implementation of the settlement.

Still, as pointed out on the WTO website, “Sales people are reluctant to fight their customers”. You can translate this as being a means to avoid trade wars.

Trade-offs are made in the best interests of everyone in the global economy with a broader range of quality and choices of products, stimulating economic growth by expanding employment opportunities. The importance of trade agreements was demonstrated by the result of trade barriers in the ‘20s and ‘30s, increased tariffs and subsidies that led to short supplies of certain products and services which in turn increased the costs in other segments of the economy.

The Fordney-McCumber Tariff Act of 1922 authorized President Harding to raise or lower tariff rates 50%. Increases ran rampant and led to somersaults in financial markets. During the term of President Hoover, the Tariff Act of 1930, known as the Smoot-Hawley Act, was originally intended to protect farming interests but expanded to nearly every segment the economy. This led to increased tariffs and subsidies of 20,000 products.

World trade declined 65% from 1929 to 1934, thus the Great Depression. To make matters worse, FDR paid for the New Deal by imposing excise fees (taxes) to Americans on all sorts of products, including electricity, cars, tires and even some food products.

China recently accused the US Treasury Secretary Timothy Geithner of implying the yuan is undervalued to keep the trade imbalance between the two countries to benefit Chinese exporters. This has been an on-going contention for years but with worsening economic conditions members of Congress are strongly hinting at legislation that would offset the “dumping” of Chinese products by imposing import tariffs.

The US and China will be major players of international protectionism. Will the Eagle be able to fend of the Tiger? Or, since Russia isn’t a member of the WTO, will the Bear claw and maim them both?

Protectionism is a nasty, unlucky thirteen-letter word.