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September 14, 2009

Myths of Protectionism: Stories You Are Likely to Hear in the Wake of the China Tire Trade Tariff Case

-- by Dave Johnson

This post originally appeared at Campaign for America's Future (CAF) at their Blog for OurFuture as part of the Making It In America project. I am a Fellow with CAF.

President Obama has decided to enforce our trade laws and imposed a 3-year tariff on Chinese tires. I suspect the country is about to witness a corporate hissy fit that will surely rival any righteous teabagger’s demands to see the President’s birth certificate.

Here is what is going on: when the US endorsed China entering the World Trade Organization the agreement was that if any of our industries were significantly disrupted, we could call “time out” and give those industries 3 years to adjust. In case after case President Bush refused to enforce this agreement as China took over one industry after another. Since we then had to buy what we used to make, our balance of trade deteriorated and we now owe China vast sums.

In this case the U.S. International Trade Commission found that America’s tire industry was, to say the least, disrupted by a surge of imports of cheap tires. As with so many industries, cheap Chinese imports quickly dominated the market, American factories closed, American workers were laid off, American communities were devastated and instead of having to pay wages and maintain factories, American CEOs and Wall Street executives pocketed more and more short-term profits at the long-term expense of their own companies and our country's economy.

So this time President Obama is enforcing the agreement and applying tariffs. In fact he is applying a lower tariff than the 55% that was recommended, but the tariff of 35% is still substantial and may save jobs, preserve some manufacturing capacity, and hold the trade deficit down just a bit.

The corporate hissy fit is beginning right on schedule. The word being shouted loudest is “protectionism” and there are threats that this will lead to a trade war.

The headline at the Drudge Report screams: “CLASH OF THE TIRES LEADS TO TRADE WAR,” linking to a Financial Times story that doesn’t actually say anything about a “trade war.” In the story China’s minister of commerce Chen Deming says, “This is a grave act of trade protectionism,” and Eswar Prasad, professor of trade economics at Cornell University, calls the enforcement of the agreement “protectionist measures” while at the same time saying the tariffs are not “substantive restraints on trade.”

The Washington Post, rather than lead with the pro-American viewpoint, chose to lead with China's, “China blasts US tire duties as protectionist blow.” Many other corporate-dominated media outlets followed in a similar vein, arguing how this is a bad decision. Wall Street Journal, “A Protectionist Wave” and "Tariff on Tires to Cost Consumers". Others, like Business Week, just reported the news: “In China Tires Case, Obama Strikes Middle Ground.” (Forbes, to its credit, led with a neutral pun, “China and US: Tire-d of Fighting.”)

So what is “protectionism” and why is it supposed to be wrong for a government to protect a country’s manufacturing interests? Isn’t America borrowing so much money from other countries because we don’t manufacture enough goods here anymore to sell and thereby pay for the things we buy?

In the past a major portion of America’s tax revenue came from collecting tariffs on imported goods. This helped fund development of our competitive infrastructure while maintaining internal markets that encouraged development of industry to make goods here both for use in the country and for export. This led to manufacturing jobs. Every country that has built up a manufacturing base has done so by restricting competitive imports.

But there were problems with this “mercantalistic” approach. As with all rules they can be manipulated by the currently-powerful. This was done to keep some prices unreasonably high, encourage monopolistic practices, reduce access to localized or regionalized specialties and discourage others from importing our domestically-made goods. So after we built up a manufacturing base the time came to start selling to others. This necessitated back-scratch trade agreements: you scratch my back by lowering your tariffs, we’ll scratch yours by lowering ours. Etc. And each country's markets expand - as does the competition.

Unfair competition led to the idea of protecting our standard of living. Unfair labor costs, kept low by use of child or prison labor, exploitive wages in non-democratic countries, even use of forced labor or slaves undercuts our own companies’ ability to compete. Failing to provide worker safety protections, or allowing pollution also provide trade advantages to offshore competitors. So to protect ourselves we imposed tariffs that raised the store price on those goods to prevent them from undermining our own standard of living and safety and pollution standards. We protected our national interest.

The idea of these "protection" policies is to encourage these competitors to pay better wages, improve worker safety and/or stop polluting. This way their own economy and environment could improve and their workers would be able to buy the things that we make. Used this way, the policy of protectionism improves living standards for workers everywhere, while growing our economy and improving our standard of living in the process.

The idea of “free trade” theorizes that without “government” involvement these disadvantages will disappear and prices will eventually reflect supply and demand instead of tariffs and regulations. Of course, this ignores that government as constituted in democracies is a banding together of the citizens for mutual protection, empowerment and benefit. The result of "free trade' is a downward spiral of wages, benefits, worker protection and environmental standards as countries race to the bottom in competition.

Expansion of trade is beneficial to all parties if done fairly. Of course, “fairly” is a difficult state to attain when powerful interests compete for dominance in rule-making. In this case we have the competing interests of American workers and manufacturers pitted against Chinese manufacturers. There are also the powerful interests of distributors and retailers who make a percentage off a sale, whatever the source of the goods, and Wall Streeters who buy up companies and demand short-term profits, and profit from debt.

This is where the opposition comes from. Certain powerful interests are doing just fine without any of this goody-goody do-gooder stuff, thank you, and they want things kept that way. So they will fight against changed in the status quo, no matter how necessary or beneficial to the rest of us. We see this so clearly in the health care reform fight and soon we will be hearing some outrageous lie on the order of "death panels" and "government takeover" to try to scare people away from fighting for their own jobs, wages and benefits by asking for reasonable trade and manufacturing policies.

Their primary scare word in use today is "protectionism."

Part II will examine some of the specific myths surrounding the mystical and powerful word “protectionism.”

Posted by Dave Johnson at September 14, 2009 3:16 PM


Comments

When i read about the President's decision, I immediately came here to read your analysis. Thanks for explaining this complicated issue. I don't know of any other author who could make the implications for our Country any clearer.

Posted by: Brenda Helverson [TypeKey Profile Page] at September 14, 2009 6:25 PM

Of course, the Chinese may very well retaliate by refusing to buy our government debt, causing a dollar crisis. We're the emperor without clothes.

We're really playing with fire here. Even if your analysis is correct, we lose.

Posted by: monk [TypeKey Profile Page] at September 14, 2009 9:04 PM

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