Clumsy Trade Policy

http://www.reuters.com/article/newsOne/idUSTRE50T5Y820090130?sp=true

I originally began this post as merely criticism of the U.S. Chamber of Commerce for opposing the “buy American” provisions in Obama’s economic stimulus package. But I soon realized that there’s a bigger issue here – that clumsy trade policy at both ends of the spectrum has its costs, whether it’s foolishly placing blind faith in “free” trade or a heavy-handed application of protectionism that threatens all trade.

 

Let’s begin with the left end of the spectrum – the U.S. Chamber of Commerce’s position. At first glance, it seems hard to believe that they would oppose “buy American” provisions in Obama’s plan.

The U.S. Chamber of Commerce stepped up efforts on Friday to kill a popular “Buy American” provision before it reaches President Barack Obama‘s desk as part of an mammoth economic stimulus bill.

But it’s not surprising. I’ve constantly warned of the consequences of the trade deficit and the method used to finance it – a sell-off of American assets – and this is one of them: that with ownership comes control. Many of the members of the Chamber of Commerce are actually global corporations, largely foreign owned and controlled, with little allegiance to America, and have major stakes in foreign operations that would be jeopardized by any move toward restoring a balance of trade.

 

 

 

 

“Some have slammed the U.S. Chamber for opposing “Buy American” provisions, calling our position ‘economic treason,'” the group’s president Thomas Donohue said in a statement.

“Try economic patriotism. Such provisions would cost American jobs, trigger retaliation from our trading partners, slow economic recovery by delaying shovel-ready infrastructure projects and cede our leadership role as a longstanding proponent of free and fair trade and global engagement.”

Yes, actually, the Chamber’s position is rather treasonous. Throughout history, traitors have assuaged their consciences by convincing themselves that what they did was actually for the good of the country. Mr. Donahue doesn’t explain how “buy American” provisions would “cost American jobs.” That’s makes absolutely no sense. Only a worsening of the trade deficit would cost American jobs. Anything that reduces the trade deficit, as “buy American” provisions clearly would, creates American jobs. It’s as simple as that. And would “buy American” provisions result in “delaying shovel-ready infrastructure projects?” Possibly, but the delay would be time spent ramping up American manufacturing, creating even more jobs. Isn’t that the whole idea?

 

But the linked article goes on to raise an important issue:

In Canada, the main opposition Liberal Party called on Conservative Prime Minister Stephen Harper to raise the issue with Obama when he visits on February 19 if the United States has not made clear that Canadian iron and steel will be welcome.

“I presume the prime minister will make this a very important issue when President Obama is here, because it has huge implications for the steel industry obviously but Canada-U.S. relations overall,” Liberal House leader Ralph Goodale told reporters in Parliament.

This illustrates the hazards of the far right in the spectrum of trade policy, a clumsy, sledge hammer application of protectionism. Why would we want to anger Canada? Canada is our number one source of oil and is a country with whom we have a balance of trade in manufactured goods. We have a very beneficial trade relationship with Canada. But our overall trade deficit, a composite of trade deficits in both oil and manufactured products with many other countries, is a serious problem – the root cause of our financial collapse.

 

Our biggest deficit in manufactured goods is with China, simply because theirs is such an enormous country with one fifth of the world’s population. We’d like to reduce our deficit with them, but what rationale would we use to justify protectionist measures? Do we simply tell China “sorry, but we don’t want to trade with you any more?” Or do we try to couch it in some logic, perhaps blaming them for currency manipulation? That hardly seems fair either. Is it their fault that the dollar soars any time there’s the least bit of positive news on the American economy?

 

And what about Saudi Arabia? How do we reconcile “buy American” provisions with our thirst for cheap, imported oil? Do we exempt them from the provisions? The whole thing starts to sound rather arbitrary, doesn’t it? And we really don’t want the more powerful of these nations to start feeling that they’re being treated arbitrarily and unfairly.

 

The problem is that we’ve held fast to our free trade policy for decades, in spite of the mountain of evidence that something is wrong – culminating in global financial collapse, without ever questioning why. We’ve taken the 18th century theories of Adam Smith, David Ricardo and others, fathers of free trade theory, at face value without ever researching factors that may limit their application – like population density, for example. And without an understanding of what makes free trade work in some instances while producing horribly skewed results in others, we then have a tendency to lash out at all trade. At least the blunt force application of protectionism would restore a balance of trade, but the U.S. Chamber of Commerce is correct in warning of backlashes.

 

A trade policy rooted in an understanding of how trade really works and how disparities in population density skew the results could restore a balance of trade while avoiding unwanted consequences. A tariff structure on manufactured goods, indexed to population density, is the answer. Leaving natural resources free of tariffs, oil suppliers like Saudi Arabia, Venezuela, Canada and Norway would have no reason to retaliate. And these same countries, along with many others, would be free of tariffs on manufactured goods because of their low population densities. Protectionist tariffs would be focused like a laser on the real problem – overpopulated nations like Korea, Japan, Germany and China. They may not like it, but at least there would be a consistent and logical rationale behind the policy.  They may like to retaliate with their own tariffs but would probably think better of it, since it would only further jeopardize their exports.

 

Any policy that moves us toward a balance of trade and restores manufacturing jobs is better than what we have now, but an elegant approach that’s rooted in logic can avoid the unnecessary collateral damage of a trade war that would only buttress arguments for a pendulum-like swing back to the opposite end of the clumsy trade policy spectrum.