This week, I was reminded about a lesson I learned many years ago while in graduate school. The lesson back then came from a prominent professor at the New York University Wagner School of Public Service (yes, I fancied myself some corporate governmental affairs wannabe). Anyhow, our first assignment – write a paper on any government policy but write about an alternative to that policy – got many of the students excited because many had particular passions about various political issues. And not that I wasn’t passionate about anything mind you but the first thought that came to mind forced me to shoot up my hand, “Can we write about doing nothing as a policy?” Doh! Wrong question as this prominent professor said in front of the whole class, “Well, that’s not what this program is all about. It’s about governmental intervention.” Well, being my typical ‘problem-with-authority self’, I picked some hugely unpopular policy which I won’t go into right now. So why do I bring all of this up you may ask?
Doing nothing of course, has policy ramifications. So when I saw this article from Crain’s Chicago this past week entitled “Free Trade Deal Falters”, I suspected a little inaction. At stake, the three trade pacts with Columbia, Panama and South Korea. These free trade deals will likely not turn into a bill by Congress and will not go in front of President Obama. Both Congressional leaders and Obama do not want to, “expose struggling manufacturers such as U.S. automakers to more foreign competition.” But for every action there is an equal and opposite reaction. And US exports will become less competitive in overseas markets, just when the US economy most needs an export boost! Instead, an Obama administration will likely focus on “enforcement” to include enforcement of labor and environmental regulations. All lofty goals but at precisely the wrong time during the current economic cycle, I would contend.
Another aspect of a do-nothing trade policy approach relates to economic stimulus plans now en vogue throughout the world. According to this Wall Street Journal article, “WTO rules don’t require government stimulus plans to be open to all bidders.” So much of Obama’s stimulus plan could fall under the “Buy America” campaign championed by Nucor CEO Daniel DiMicco and still not violate WTO rules. “Buy America” will have tit for tat ramifications in other markets. The danger of course is that European and Asian markets will recoil against the US, not for commodity steel products but for value-added manufactured products produced by the likes of John Deere and Caterpillar.
On top of all of this, the trade lawyers are getting busy again with more anti-dumping suits – brought to you by the US steel industry! What our government officials tend to forget is that when anti-dumping suits are filed here in the US against foreign firms, most notably from China, then the Chinese alter their tax schemes and policies making it more difficult for US companies to be competitive in Chinese markets. It’s a a tit for tat game of distortion. And in tough economic times, it will come back to bite us.
Back in 1929, a famous piece of legislation called the Smoot-Harley tariff became the law of the land. According to the Cato Institute, “Rates on dutiable imports rose to their highest levels in over 100 years.” Some of these increases were in the 50-100% range.
This chart shows the effect of Smoot-Harley on global trade:
This act was backed by a Republican Congress.
Some claim that legislation caused the Great Depression and others claim if it didn’t cause it, then it certainly made things a whole lot worse. Whether we squeeze global trade by raising duties, enforcing labor and environmental laws at the expense of free trade deals or doing nothing, we get in effect, protectionism. Can we afford that policy right now?