Tuesday, September 2, 2014
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Protectionism Rides Again

Round up the usual suspects. In any US presidential election campaign, you can be sure that protectionism will break in, as it has. But America's swing back toward protectionism started long before, with President George W. Bush's steel tariff of 2001.

It was hard to understand what the underlying calculus was when the Bush administration imposed that tariff on steel imports. The tariff was bad economics: it made America poorer. The tariff was bad mercantilism: it robbed more in profits and unionized jobs from steel-consuming industries than it gave to steel-making industries, and the former were at least as well-organized and vocal in Washington as the latter.

Finally, the tariff was also bad diplomacy: why should anyone enter into an agreement with a US government that appears eager to demonstrate that it will break its commitments for the tiniest of imagined domestic political benefits?

Unfortunately, America's swing back toward protectionism did not stop there. It continued last year when the Bush administration, recognizing that it had no policies to boost employment, explored whether China's undervalued exchange rate might be blamed for closed factories in Ohio.

No surprise, then, that the Democratic Party has now picked up the protectionist baton. Its leading candidate for the presidential nomination, John Kerry, talks about how "Benedict Arnold CEO's" betray America by outsourcing jobs. Kerry's remaining competitor, John Edwards, talks about how the gap on trade between him and Kerry is wide and deep - with Kerry on the free-trade side.

The past three years have seen much less progress on freeing up world trade than almost any free-trade advocate would have hoped. Unless the swing of the pendulum in the US can be stopped, the rest of this decade will be as bad.

Neither the European Union nor Japan can be counted upon to do anything more than allow themselves to be dragged kicking and screaming into trade liberalization agreements. Without aggressive US leadership - which means a US executive and congress that believe in free trade - trade liberalization simply will not happen, and there will be more "emergency" tariffs, "extraordinary" quotas and "voluntary" export restraints.

All of these steps will have minimal impact on the US. But they have the potential to cause countless disasters for emerging market countries that export to America.

Can anything halt this swing of the pendulum? Absent a sudden, immediate, and strong boost in US domestic demand that turns into a durable boom with rapid employment growth, probably not. The fall over the past three years in the proportion of the working-age population with jobs in America has been the biggest in percentage terms since the Great Depression.

American workers and voters are more anxious about job security and more willing to blame anything for job insecurity because they have seen the most profound deterioration in labor market conditions in the memory of anyone younger than eighty-five. That slack labor market is powering this swing of the protectionist pendulum.

So we probably must accept that protectionist sentiment will remain strong. But we should seek ways to diminish the time spent and the damage done at the protectionist end of this political cycle. There are two arguments and one economic shift that could accelerate a return to trade liberalization.

The two arguments in favor of free trade are powerful, but by and large they have not been deployed. The first argument needs to be made by countries that export to the US: they should tell journalists, politicians, voters, and workers in the US about all the American jobs that would not exist without their exports to America. Fear that expanded trade will destroy jobs and disrupt the American economy needs to be balanced by fear that reduced trade will destroy jobs and disrupt the American economy.

The second argument needs to be made by those who care about America's national security. The 21st century will see the world constantly at war against terrorism. An important part of that war will consist of shaping the foes of terrorism into a durable alliance. Increased world trade can be an important part of that alliance-building process.

An economic shift also needs to be carried out by Europe and Japan: a shift from deflation to reflation. Strong demand growth in Japan and Europe that produces a higher level of American exports would be the most powerful pro-trade liberalization force imaginable.

For too long, Europe and Japan have subordinated the quest for full employment to other goals, whether extremely low inflation (Europe) or avoiding the costs of a bubble economy (Japan). Convincing ordinary American voters that trade liberalization is a positive force will be easier when the US is not the only locomotive pulling world demand forward, and not the world's importer of last resort.

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