Friday, November 21, 2003

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The perils of creeping protectionism

The Bush administration succeeded in Miami in creating a "lite" version of the Free Trade Area of the Americas. Despite what the Los Angeles Times thinks, that's still better than nothing, and should be interpreted as a modest step towards liberalization.

However, the Economist highlights the latest protectionist move by the Bush administration:

On November 18th, Grant Aldonas, under-secretary at the Department of Commerce, announced new import quotas on Chinese dressing gowns, knitwear and bras, capping their growth next year to just 7.5%. Mr Aldonas invoked a clause in China’s treaty of accession to the World Trade Organisation, which allows America to constrain import surges that threaten to disrupt domestic markets. The bra-buying public, benefiting from cheap Chinese imports, may not have noticed any market disruption. But America’s textile firms, suffering from plant closures and job losses, would disagree. Now, the Commerce Department has shown that it is willing to use every device at its disposal to ward off the menace of cheap dressing gowns....

The quotas announced on Tuesday were in themselves only a small creep forward for protectionism. They cover only a few products, although the limits they impose will pinch tightly: China’s exports of cotton bras to America, for example, grew by nearly 32% in the first nine months of this year, according to the American Manufacturing Trade Action Coalition. The symbolism of this protectionist gesture is probably of more consequence. It shows that America is willing to shield its textile workers from foreign competition even after the mesh of quotas that currently trammel the global textile industry is undone next year. This prospect alone is enough to weigh on the plans, expectations and share prices of Asia’s light manufacturers. The gesture is also weighing on fraught Sino-American trade relations. The day after the quotas were announced, China cancelled a trade mission to the United States to buy American cotton, wheat and soyabeans. It also seized the occasion to announce that it is considering retaliatory measures against America’s illegal steel tariffs.

The story also highlights a recent speech by Federal Reserve Chairman Alan Greenspan (sponsored in part by the Economist). The entire speech is worth reading -- it's about how increased financial globalization has permitted greater flexibility for the U.S. to run a large current account deficit. However, it ends with a cautionary note:

Should globalization be allowed to proceed and thereby create an ever more flexible international financial system, history suggests that current imbalances will be defused with little disruption. And if other currencies, such as the euro, emerge to share the dollar's role as a global reserve currency, that process, too, is likely to be benign.

I say this with one major caveat. Some clouds of emerging protectionism have become increasingly visible on today's horizon. Over the years, protected interests have often endeavored to stop in its tracks the process of unsettling economic change. Pitted against the powerful forces of market competition, virtually all such efforts have failed. The costs of any new such protectionist initiatives, in the context of wide current account imbalances, could significantly erode the flexibility of the global economy. Consequently, it is imperative that creeping protectionism be thwarted and reversed. (emphasis added)

Compared to Greenspan's usually tortured syntax, this amounts to a clear warning. Go back to the Economist story on why creeping protectionism could threaten the U.S. balance of payments:

Chinese exports of textiles may be surging. But of greater significance to America's deficit are signs that European exports of capital may be starting to ebb. According to figures released on November 18th, foreigners poured just $4.2 billion (net) into American stocks, bonds and notes in September compared with over $50 billion the month before. America has not seen such a sharp turnaround in capital flows since the terrorist attacks of September 11th, 2001. The volte-face was most striking among European investors. Over the first eight months of this year, according to Morgan Stanley, Europeans made net purchases of American assets averaging around $28 billion per month. In September, they stopped buying and started selling, offloading a net $403m.


UPDATE: Brad DeLong -- who also picked up on the Greenspan speech -- has some intriguing gossip about the bureaucratic politics behind the textiles decision.

Paul Blustein also has a good take on recent events in the Washington Post.

posted by Dan on 11.21.03 at 10:51 PM


The obvious question suggesting itself is whether the Europeans were reacting in September to the administration's "creeping protectionism." This seems unlikely.

Actually the Economist story refers to foreigners, not just Europeans, so it is possible that the net sale of American assets by foreigners reflects steps taken by Asian central banks more than anything else. Protectionism, or the prospect of it, would certainly be important in that context, how important isn't clear.

posted by: Zathras on 11.21.03 at 10:51 PM [permalink]

I suspect that Karl Rove might be responsible for encouraging President Bush towards protectionism. This may turn out to be the worst mistake of the administration. The President must reverse our current steel trade policy---before it's too late. If Bill Clinton had the guts, why not expect the same from George W. Bush?

posted by: David Thomson on 11.21.03 at 10:51 PM [permalink]

David Thomson: "If Clinton had the guts, why not expect the same from George W. Bush?"

What has W. ever done that would suggest he has any personal courage whatsoever? (And going to war in Iraq when the majority of Amerricans supported it, is not being courageous.) I wasn't a Clinton fan, but I am impressed when I found out that he stood up to his drunkard father at the age of 13, to stop the bastard from beating Clinton's mother. That takes guts. Something that W. doesn't have, his fake cowboy bravado notwithstanding.

posted by: albertan in name only on 11.21.03 at 10:51 PM [permalink]

Creeping? Seems like protectionism fully grown springing from the brow of Zeus - er.. Bush.

I still stand in shocked amazement at those who cling to some desperate hope that this is all just a dream and GW really has an economic plan.

posted by: John on 11.21.03 at 10:51 PM [permalink]

I would be annoyed if this were protectionism in the full sense of the word, but its not. While Europe too plays these games, and it has bitten the US on the steel front, I do not have sympathy or a desire to give an inch to the Chinese on the trade front.

Let China retaliate. I've been in China; while the cities are nice, let me assure you, the working conditions and standards for the average manufacturer (you know, the industy in Asia that China is single handedly deflating) make a mockery of WTO rules.

I would think that there would be less concern over our unwillingness to play ball with this nation (especially if that right is within the rules) and more over working conditions in China, not to mention US assets all over Asia. Here is a novel way to make everyone win... ENFORCE THE EXISTING STANDARDS EQUALLY. There is a reason Chinese products are cheap, I assure you.

posted by: PB on 11.21.03 at 10:51 PM [permalink]

I don't disagree with PB, inasmuch as nothing will evaporate American support for free trade faster than acting on the assumption that we must comply with agreements other nation's are violating openly. My initial post on this thread raised a different point, namely whether recent changes in foreign investment in the United States is related to American trade policy or is instead a product of something else. "Something else" could mean the prospect of better returns elsewhere in the world, political decisions made for reasons unrelated to trade by Asian central banks, or low interest rates in the United States.

posted by: Zathras on 11.21.03 at 10:51 PM [permalink]

"What has W. ever done that would suggest he has any personal courage whatsoever?"

Personal courage? I suppose that overcoming alcoholism requires some amount of personal courage.

Bush is surrounded by economics advisors who strongly oppose protectionism, and political advisors who favor it because, honestly, it is popular. That's why it is fair to describe it as "creeping." These moves are done as much to curry favor with the unions (who have votes) than with the businesses. (As far as businesses go, the free trade voices outweigh the protectionists, on the whole.) And largely this is done because union voters are seen as "swing voters" that might be amenable to voting for Bush.

I think it's a foolish mistake, not only for policy reasons, as the Democrats have the union protectionist vote sewn up anyway. Like many of us, I'd rather see him go after libertarian swing voters. (Of course, that many free trade-favoring socially liberal types I know would vote for Bush only when Hell freezes over, and probably not even then, certainly doesn't make Rove and others think that they are winnable swing voters. )

As far as Clinton goes, it's very true that he did an excellent job refusing to impose new tariffs, which is very good. It's also true that he was unable to get new deals signed. (Chile in particular wanted a free trade deal with the US for quite some time.) That's at least partial evidence that there may be somewhat of a tradeoff involved. Is it worth it?

Of course, in the case of many of these tariffs and subsidies, we would be better off buying the employees and companies out of industry. (It's likely that the unions would be the ones most strongly opposed to such buy-outs, which would reduce the political power of the overall unions. But that's the agent problem.)

posted by: John Thacker on 11.21.03 at 10:51 PM [permalink]

This is what free-trade enthuisiasts have forgotten in also embracing laizze-faire capitalism while denigrating "redistribution" and degrading the social-safety net. We are already reaching the limits of the political viability of gloabalization as currently structured, both in small and large countries. The signs are everywhere from the failed Cancun WTO talks, the tenative hemispherical agreement, the tensions with China, etc.

Market "true believers" both gloss over gross market failures even in First World countries such as the present Mutual Fund scam, and wholly neglect role of the development of social Progressivism and the development of the social safety net as a compromise that allowed the development of modern capitalism. That is individuals and societies were willing to take the personal risk of loss through the capitalist system if in turn there was sufficient "redistribution" in the form of a social safety net from the "winners" in order to ensure minimal standards of living for the "losers". The other precondition was equal opportunity or at least as level a playing field as could be reasonably created through effective market regulation.

The continuing scandals regarding corporate governance and the blatant unfairness of market participants scamming small and mid-size investors and institutions are both counter-examples of the necessary equality of opportunity ideal necessary. Absent these social compromises and informal agreements, globalization is quickly reaching the limits of its political and social acceptability, and dangerous forms of protectionism are already on the rise and will continue to do so because of the unrelieved pressures of unfair market competition and rules.

posted by: Oldman on 11.21.03 at 10:51 PM [permalink]

"Personal courage?"

I'd like to see you sit in the cockpit of a Century Series jet and push the throttle up for takeoff.


posted by: Billy Beck on 11.21.03 at 10:51 PM [permalink]

I have a vague sense that the Bush administration is overestimating its bargaining power in international trade. For most of the post world war II era, the United States has been fairly successful in exploiting its economic vitality in trade negotiations, especially with market oriented, developed countries. Even though the United States is still a critical source of growth for the world economy, the rest of the world now has more options. There are now more players in the game, more countries that are valuable markets for agricultural, manufactured, and high tech goods. I do not see Europe or China backing down from the U.S. in latest trade spat. Similarly, the Bush administration probably decided that Brazil was not going to stick to its guns in the FTAA negotiations and wisely chose something over nothing.

posted by: SamS on 11.21.03 at 10:51 PM [permalink]

There may be some Bush administration officials who overestimate American leverage in trade talks, but I doubt this is the driving force behind administration policy. Rightly or wrongly, trade falls for this administration under the heading of "domestic policy," and every domestic policy issue is treated by this White House primarily with a view to the next Presidential election.

USTR Zoellick genuinely believes in trade liberalization, but his flexibility is strictly limited. When the choice is between a move that will advance trade negotiations and one that promises to win votes, Zoellick's trade negotiations will lose every time. Does this weaken America's position internationally, and pose risks to American jobs over the long term? Of course it does. Is it worth losing votes next year to avoid those risks. I doubt you will find even one person working in this White House who would answer "yes" to that question, and George Bush himself would probably look at a person asking it as if he were crazy or drunk.

You could make an argument that Bush, instead of departing radically from the trade policy of past administrations, is only continuing the absolute priority domestic politics had on this subject during the later years of the Clinton administration. Early on, when his approval ratings were low anyway and he was at pains to demonstrate that just because he was a Democrat he wasn't a slave to Democratic interest groups Clinton (and Al Gore) worked hard and took risks to secure NAFTA's adoption. As his approval rating climbed Clinton grew anxious to preserve them, and less eager to press an issue where much of his support in Congress would come from members of the other party. So even though he did press ahead with promoting normal trade relations with China -- a somewhat technical step the implications of which were not all that clear to most Americans -- he declined to press Congress to renew "fast-track" negotiating authority and made the embarassing collapse of trade talks at Seattle in 1999 worse by throwing verbal bouquets to demonstrators. Once he had gotten his base firmly underneath him Clinton was not about to upset it, or swing voters, by taking any risks for trade. Bush won't either.

posted by: Zathras on 11.21.03 at 10:51 PM [permalink]

"I wasn't a Clinton fan, but I am impressed when I found out that he stood up to his drunkard father at the age of 13, to stop the bastard from beating Clinton's mother"

Stepfather-not father, an excellent example of the way in which domestic violence in broken or "repaired" homes is discussed as if it is in an "old fashioned" family.

posted by: tom on 11.21.03 at 10:51 PM [permalink]


You notice how the albertan managed to work in the word "bastard" though, while trying to suppress it, as you point out. An admission of his misunderstanding, embedded in his response. "Go, Go, gadget brain!"

posted by: TommyG on 11.21.03 at 10:51 PM [permalink]

Ok. So protectionism is bad and global trade is good. WHY? In *painful* detail please.

Isn't Agriculture a highly protected industry in most developed countries? In France it's the most protected industry of all. In America it might be the most protected, I'm not sure because I really don't care all that much. But in both cases those industries are pretty healthy.

So why would it be bad for America to impose a 100% tariff on all Chinese made products? So what if it hurts the Chinese economy? Isn't the Chinese government rigging the game by directly manipulating the value of it's currency? Wouldn't a tariff imposed counter that?

Frankly I've been pretty unimpressed by what global trade has wrought. From what I've seen there would be real benefits to a 100% tariff on all imported goods. Least of which would be more domestic manufacturing.


posted by: ed on 11.21.03 at 10:51 PM [permalink]

“Frankly I've been pretty unimpressed by what global trade has wrought. From what I've seen there would be real benefits to a 100% tariff on all imported goods. Least of which would be more domestic manufacturing.”

In that case, you have no right to shop at Wal-Mart or Target. Are you really saying that you are willing to pay substantially more for your TV, microwave, and other now commoditized household items?

posted by: David Thomson on 11.21.03 at 10:51 PM [permalink]

Why tariffs are bad. Example.

Steel tariffs. Rockford, Illinois is a steel using town. When the tariffs were imposed a lot of supplier/customer relationships needed to be adjusted.

Now when manufacturers in other countries can get steel for less than we can they bid lower. Guess where those jobs are going?

So now we are not competitive in either manufacturing or steel.

Tariffs help how?

posted by: M. Simon on 11.21.03 at 10:51 PM [permalink]

When the United States is running a half trillion dollar trade deficit why do Bush Administration tariffs attract more attention than the half trillion dollar trade deficit?

I honestly do not understand this. Our trade barriers are so low that we are importing hundreds of billions more than we are exporting. Shouldn't we be more worried about that? I've read arguments for why we shouldn't care. But those arguments all read like rationalizations.

As for the bit about Greenspan talking about "how increased financial globalization has permitted greater flexibility for the U.S. to run a large current account deficit". Why is this a good thing? Wouldn't the US be better off if it had less ability to run a huge current account deficit? Wouldn't the US be better off if it had to pay as it went? We are spending more than we are making. We are gradually becoming more indebted to the rest of the world. I can't see how that can be a good thing.

posted by: Randall Parker on 11.21.03 at 10:51 PM [permalink]

David Thomson, If Ed doesn't buy his microwave at Wal-Mart or Target where is he supposed to buy it? It is not like he even has a choice to buy the domestic alternative for many things because some things aren't made here anymore.

I think the argument about currency manipulation is a good one. Should countries be allowed to enact what are essentially reverse-tariffs on their exports by devaluing their currencies? If tariffs are placed on goods from countries that have fixed their currencies then doesn't a tariff just compensate to bring up the price of goods from those countries to market values?

posted by: Randall Parker on 11.21.03 at 10:51 PM [permalink]

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