Here’s another interesting BusinessWeek story. This one is about the stimulus bill and its (problematic) relationship to our trade agreements.
Here’s another interesting BusinessWeek story. This one is about the stimulus bill and its (problematic) relationship to our trade agreements.
The tension between protectionism and free trade as related to current national policy merits class debate, as it has headlined news for the past several months. Although the “Buy America” phrase is more rhetoric than action, it is an illustrative principle with which to begin the discussion. With that in mind, here are a few of my thoughts:
The Buy America clause not only creates US protectionism, but increases the desire for protectionism elsewhere. If a lesson can be learned from the Smoot-Hawley Tariff Act of 1930, it would be that protectionist measures in times of global financial crisis only expedite the disintegration of global economic stability. The passing of Smoot-Hawley Tariffs naturally resulted in a decrease in imports, but surprisingly decreased exports as well. Self-survival policies of protectionism ensure the gain of the individual state at the cost of others, encouraging states impacted by the tariffs to enact their own protectionist measures. Today’s New York Times includes an article called “Concept of One Europe is Strained by Financial Crisis” (http://www.nytimes.com/2009/03/02/world/europe/02euro.html?_r=1&hp). According to the article, the concept of European solidarity is being undermined, in part by protectionist measures within and outside the continent. If more countries passed protectionist measures, free trade and cooperative trade zones, the EU included, would be pulled apart. According to the factor-productions theory/Heckscher-Ohlin theory, protectionism in any global financial context will cause a decrease in the world economy, since free and international trade based on comparative advantage increases the potential prosperity of all involved. Simply put, spurring US growth in areas where it doesn’t hold comparative advantage is disadvantageous in the long run; “Buy America policies”, although mostly rhetoric, promote an economic ideology that will prolong the global recession. As the current (though declining) hegemon, the United States needs to follow the HST by promoting free trade, even in times of global economic instability when national unemployment may be affected. “Buy America” is not a global stimulus.
The case study of the Mitterand government in 1980’s France illustrates a major dilemma faced by policymakers when they initiate a stimulus policy. The socialist 1981 fiscal expansion brought France out of a Europe-wide recession, but because a large portion of the stimulus and subsequent increase in disposable income leaked out in the form of imports, France began 1983 with a larger trade deficit as well as forced devaluations of the franc (It should be stressed that doubts over the financial feasibility of the plan, as well as fear of capital controls, also contributed to a fall in the franc). As a result, the socialist expansion ended that year. We should heed this lesson: an isolated stimulus bill done without international cooperation could well lead to the United States helping pull others out of recession at the expense of its trade balance and financial stability. The purpose of the buy american clause is to prevent this by concentrating as much of the stimulus spending in the US as possible (or more for political reasons, as such as clause would benefit those Americans in import-competing jobs, the ones most hurt by free trade and with much public sympathy, i.e. steelworkers, automotive).
However, sharp contrasts must be drawn with the French example. US trade as a percentage of GDP is a fraction of France’s ratio, and as other nations (including China) are enacting stimulus policies of their own, the possibility of reciprocal treatment could lessen whatever benefits this clause has to American workers. Carolyn was right in pointing out that such a clause, which on the surface appears to have a minimal impact on global trade flows (especially when compared to the disasterous impact of a fall in consumer spending in developed countries), now is no time to sow doubts about our commitment to free trade. The world economy requires a global stimulus initiative, commitment to free trade, and joint bailouts of vulnerable transnational financial institutions.
The language contained in the final stimulus bill understandably disturbed some of our major trade partners abroad. Despite the fact that the “Buy American” clause is functionally toothless, it gives credence to a dangerous line of economic thinking in these troubled economic times. In October of last year, Warren Buffet famously beseeched the American public in a New York Times op-ed to “Buy American. I Am.” This form of economic nationalism is understandable and, perhaps at an individual level, justifiable. However, economic nationalism at the state level is treacherous. At the recent World Economic Forum in Davos, several speakers, Tony Blair among them, implored the guests not to pursue protectionist policies despite strong pressures from domestic interest groups. He likely foresees a domino effect that will deal another blow to an already reeling global economic system. As Carolyn noted, the current nationalist economic sentiments in the U.S. and abroad are reminiscent of the Smoot-Hawley Tariff passage in 1930. The passage of the “Buy American” clause has and will continue to incite protectionist measures globally. A decrease in global trade volumes is inevitable in the current recession, but this clause threatens to undermine global trade even further. In the Financial Times’ extensive coverage of the current tendency towards protectionism, op-ed contributor Prof. Jagdish Bhagwati warns that our foreign trade partners are not likely to see this move as a reasonable step to shoring up American industry and thereby stimulating global demand. Rather, they are likely to view this as a threat, as many did following the passing of the Smoot-Hawley Tariff, and respond in kind. If Prof. Bhagwati’s predictions are realized, this will mean a longer decrease in aggregate global trade volumes and a longer recession.
The implication of tighter visa restrictions on the hiring practices of those companies receiving TARP funds is interesting in light of our recent consideration of Locke’s progressive “For a General Naturalisation.” Locke would argue that all undocumented aliens should be given the right to come, live, and work in the U.S., for “’Tis the number of people that make the riches of any country.” According to Locke, the U.S. should endeavor “to make as much as you can and to vent [sell] as much abroad as you can abroad.” According to him, this is accomplished by augmenting the labor force. Tighter visa requirements put American workers employed in many low-income positions at an advantage when compared to undocumented aliens. However, this advantage for individual workers could be a disadvantage for American industry and the viability of its exports, as companies are no longer able to fill some positions at a significantly lower wage by employing foreign workers. They will consequently face higher costs of production, which will raise the relative cost of their products to both domestic and international consumers. The trade-off between the interests of American workers and the interests of domestic producers is not clear-cut and clearly requires further debate, especially when considering its potential consequences on global trade volumes in the current recession.
Continuing on the comments above, the most disturbing aspect of this entire crisis is the way history has repeated itself. The housing crisis that we are now dealing with is not that dissimilar in nature to the stock market crash of 1929. Both during the ‘roaring’ 20’s and the boom of the late 2000’s, money was cheap and readily available to nearly anyone regardless of the potential for default (interestingly enough, the gap between rich and poor grew in similar ways too.) The modern consumer credit system was first widely accepted and used in the 1920’s and many people took advantage of it to live beyond their means, which was reflected in the stock market. It appears that this is exactly what consumer’s have been doing over the last few years -specifically in the housing market. Now, rather than learn from our past mistakes, we are simply repeating them by encouraging isolationism. If it failed in the 1930’s, it is very unlikely that such economic hogwash will succeed today, especially when our economy is far more globally integrated and dependent than it was 80 years ago.
Furthermore, forcing the economy to ‘buy American’ when cheaper, foreign options are available effectively decreases the purchasing power of the bailout funds which, when the goal is to create jobs through federal projects, will allow less money to be spent on creating real jobs.
Today, we cannot ride this storm alone. Isolationism will do just that; isolate us from foreign investment and goods and services that will be necessary for rebuilding our economy.