Washington, D.C. "Some
clouds of emerging protectionism have become increasingly visible on
today's horizon. Over the years, protected interests have often endeavored
to stop in its tracks the process of unsettling economic change. Pitted
against the powerful forces of market competition, virtually all such
efforts have failed."
I heard this warning from Alan Greenspan, the chairman of the Federal
Reserve System, at the Cato Institute's Annual Monetary Conference last
week in Washington, D.C. Greenspan is obviously concerned about the
confusing foreign trade policy of the Bush Administration that preaches
free trade for the world while imposing new tariffs on steel and quotas
on textiles.
The rules of the World Trade Organization (WTO) provide that countries
may take protective measures when imports cause "market disruption."
What that means, however, is anybody's guess. Why, for example, would
the Commerce Department impose a 7.5 percent quota against $497 million
worth of bras, dressing gowns, and knitted fabrics from China but only
selectively against textile imports from other foreign sources?
The people whose incomes are at stake always demand that government
protect their products from foreign competition. While politically opportune
for vote-seeking politicians, economically the imposition of barriers
to imports is usually shortsighted. The targeted countries are prone
to retaliate in similar fashion against our exports. As a rule, international
trade has always been governed by the principle of reciprocity.
Whenever the U.S. imposes import restrictions, the losers are not only
the foreign producers but also American consumers, including American
industries dependent upon such imports. Worse yet, when a foreign trade
partner retaliates, American exporters may also get hurt.
If the Bush Administration hits textiles and toys from China with tariffs
or quotas, the Chinese government may reciprocate with tariffs on American
agricultural exports. The National Association of Manufacturers (NAM)
frequently complains about the threat certain Chinese imports pose for
competing American products. Yet, if the U.S. places barriers on selected
Chinese imports, Chinese retaliation may in turn hurt other NAM members.
WTO declared the Bush administration's tariffs on steel imports illegal,
and the European Union is threatening to retaliate with $2.2 billion
in tariffs on American steel. As yet, the White House has not indicated
that it will yield. It also refuses to reduce American farm subsidies
even though American agriculture is far more productive than most of
its competition abroad. Retreating from protectionist positions becomes
more difficult for both Republicans and Democrats with the approaching
presidential elections.
The widespread assumption that the loss of 2.5 million manufacturing
jobs under the Bush administration has been caused by the flooding of
the American market with cheap foreign goods is only partially valid.
The president's chief economist, Gregory Mankiw, recently admitted to
a congressional committee, "U.S. job losses are more closely related
to declines in domestic investment and weak exports than to import competition."
Only one fourth of the losses in manufacturing are being attributed
to increases in foreign imports.
In a world of open markets, the painful pressures of competitive prices
must be overcome through means other than subsidies, tariffs, quotas,
and sanctions. If the Chinese revalued their currency, American exports,
particularly farm products, would become less expensive for them while
the prices of Chinese goods would be less threatening to competing American
industries.
At present, the outlook for progress on freer trade worldwide is not
promising. The global trade talks at Cancun went nowhere. The conference
of the Free Trade Area of the Americas (FTAA) at Miami solved nothing
when it allowed each of the 34 countries represented--Cuba was absent--to
choose whatever industry or goods it wanted to protect.
Opening up complex markets bilaterally, multilaterally, or even worldwide
cannot be achieved painlessly. It may require reshaping of industries
that cannot compete in the world market. It certainly requires the willingness
of every trading country to compromise and make difficult concessions
for the common good.
If the U.S., the world's strongest economy, cannot offer the world a
barrier-free market, who else can?