The Rise of Protectionism
It happens in every economic crisis. Beset by shrinking GDP and
rising unemployment, nations circle the wagons and erect barriers against trade
and immigration. Anyone in power ought to recognize such responses as stupid
and self-defeating, and they probably do. But the protectionist urge persists
because it is expedient. It allows politicians to act as if they are doing something
to protect their citizens. So it is not surprising that the U.S. Congress is
showing signs of a renewed and unattractive nativism, even if it is cloaked in
the guise of fairness, safety, or protecting the American worker.
These protectionist tendencies worry economists, as well they
should. Most recognize the protectionist Smoot-Hawley Act of
1930 as a disastrous legislative blunder that sparked an international trade
war and prolonged the Great Depression. Anything that slows growth, as
protectionism does, will deepen today's economic distress. Moreover,
trade is already taking a hit because of the global recession; it doesn't
need any help from Congress. Imports to the U.S. in February, for example, were
29 percent less from the same time a year before, and exports were down almost
17 percent. All told, the World Bank is estimating that global trade will
contract 6.1 percent this year.
Fortunately, this is not the 1930s. Global trade is down more
because of recession than rampant protectionism. And the larger fact is that
every time the new nativists have tried to do something particularly egregious,
such as erect substantive trade barriers, other forces have coolly cut them off
at the knees. Institutions like the World Trade Organization, the clout of
exporters, and the realities of globalization have blunted the worst instincts
of economic nationalists.
There might be new Smoots and Hawleys lurking on Capitol Hill
and in parliaments throughout Europe. This time, though, they won't
get their way.
Buy American
Take the Buy American provisions. In the original House
bill, all infrastructure projects funded by the
href="http://moneywatch.bnet.com/economic-news/feature/the-787-billion-question/280983/">stimulus
package were required to use U.S.-made iron and steel; the Senate added
language extending that requirement to all manufactured goods. There seemed to
be a sensible premise to this — how better to stimulate the economy
than to provide a guaranteed market for goods “Made in the USA”?
But the rest of the world did not see it that way. The
president of the World Bank, Robert Zoellick, called the idea “very
dangerous,” while Canada’s ambassador to the U.S. wrote in
a snippy letter to the Senate that “the United States will lose the
moral authority to pressure others not to introduce protectionist policies.”
The European Union threatened it would “not stand idly by.”
Major U.S. companies also weighed in.
href="http://finance.bnet.com/bnet?Page=Quote&Ticker=GE">GE
and
href="http://finance.bnet.com/bnet?Page=Quote&Ticker=CAT">Caterpillar,
for example, lobbied against it, fearing that the inevitable retaliation would
hurt their ability to export or win contracts abroad.
As it turns, out, there was less to the Buy American
stuff than met the eye. The U.S. has had similar provisions in effect since
1933, and most countries give some preference to domestic producers in sourcing
government projects. But the provision did go well beyond the norm, and
violated U.S. commitments under NAFTA, the WTO, and any number of other
trade-related acronyms.
In response to pressures from these groups, Congress
added language that nothing would be done that violated existing U.S. trade
agreements. This weakened “Buy American” considerably.
Though Chinese, Indian, and Brazilian suppliers are still affected, there are
loopholes here, too. Foreign sourcing can also be used if domestic procurement
is 25 percent more costly or would be “inconsistent with the public
interest” — a phrase so ambiguous that in practical terms
it guts the bill entirely.
In principle, members of Congress can still go back to
their districts and tout “Buy American”; in practice, the
provisions have been watered down into a very thin gruel.
Trade Skirmishes
April showers bring May flowers, and just as inexorably,
economic stress brings out the protectionists. According to a
href="http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22105847~pagePK:64257043~piPK:437376~theSitePK:4607,00.html">March
report from the World Bank, in the past six months, 17 members of the G-20
have implemented 47 different trade barriers in the form of subsidies, higher
tariffs, or import restrictions. Harvard economist Kenneth Rogoff is worried. “The
U.S. is in such great danger of backing away from free trade,” the
former chief economist at the International Monetary Fund
href="http://www.nytimes.com/2009/03/23/world/23trade.html?_r=1&scp=1&sq=trade%20barriers%20rise%20as%20slump&st=cse">fretted
to The New York Times recently. “The next two years could be a
disaster for free trade.”
Consider the case of the Mexican trucks: Under the 1995
North American Free Trade Agreement, the North American borders were supposed
to be open to cargo transport by 2000. Nine years later, mostly because of
union opposition, that has not happened. (The pretext was that Mexican trucks
were not as safe and clean as U.S. ones; there is no evidence to support this.)
So Mexican trucks can only operate near the border. Worse, Congressional
Democrats slipped a provision into the budget bill canceling funding for a
pilot program that has allowed Mexican trucks to ship goods around the U.S.
Justifiably ticked, Mexico responded by imposing tariffs on $2.4 billion worth
of U.S. imports.
Not nice, but that will not stop the wheels turning on
the two countries’ $350 billion trade relationship. In fact, earlier
this year, Mexico cut its tariffs on 70 percent of all imports. Mexico is not
interested in a trade war. And neither is President Obama; he has already
hinted at reinstating the truck program. Moreover, his rhetoric as President
has been conspicuously more friendly to free trade than when he was as a
candidate.
Under the rules of global trade as set down by the World
Trade Organization, all countries have wiggle room in their terms of trade, and
most have set their tariff rates far below the maximum allowed. So while India
raised its tariffs on steel, it was still within the WTO rules. And that’s
the point. Unlike the 1930s, there is a well-established and reasonably
well-functioning trade architecture in place. The economic stresses right now
are intense, and it’s not helpful that Europe is raising subsidies on
dairy products, Brazil is hiking tariffs on steel, and China is banning Belgian
chocolate. But these are trade scuffles, not harbingers of a trade war.
Restricting Visas
For an example of a boneheaded, counterproductive, and
frankly nasty bit of anti-foreigner policy, look no further than the provision
in the Senate version of the stimulus bill that forbade companies that took
bailout money from hiring immigrants on H-1B visas. Among the companies
affected:
href="http://finance.bnet.com/bnet?Page=Quote&Ticker=C">Citibank,
JP
Morgan, and
href="http://finance.bnet.com/bnet?Page=Quote&Ticker=GS">Goldman
Sachs.
In the context of a 150 million-person labor market, the
measure was not that big a deal. But it was troubling nonetheless because it
betrayed economic sense in favor of an anti-foreigner sensibility. “It
was shortsighted and wrongheaded, because these are the people who come in,
seize opportunities, and start things,” says Indian-born Jagdish
Bhagwati of Columbia University. “It
just doesn’t make sense, even during a recession.”
A little background: There are 65,000 of these visas
granted every year, plus another 20,000 for foreign graduates of U.S.
universities with advanced degrees. In recent years, the cap has been reached
on the day of filing, April 1, and the final selection made by lottery.
The argument for banning bailed-out companies from using
the H-1B program is that companies receiving U.S. funds should be hiring U.S.
workers. But there is no evidence that H1-B holders displace U.S. workers. And
there is overwhelming evidence that highly skilled immigrants are great for the
economy. Want proof? Consider the results of two recent studies,
href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=990152">one by Duke
University and
href="http://www.nvca.org/index.php?option=com_content&view=article&id=79&Itemid=103">one
by the National Venture Capital Association. Among the results:
- Foreign nationals accounted for almost a quarter of
international patent applications in 2006 — up from 7 percent in
1998. - More than half of Silicon Valley start-ups had at least
one immigrant founder; the figure for California as a whole was 39 percent. - Immigrants to the U.S. have helped to found one in four
public companies over the past 15 years. - In 2005, publicly traded, venture-backed companies
founded by immigrants to the U.S. generated more than $130 billion in revenue.
In light of all this, one could argue for more H-1Bs
as a tried, true, and cheap long-term stimulus. That may be politically
impossible at the moment. But what was possible was a weakening of the H-1B
restriction, and that is what happened. Recipients of bailout funds can employ
workers on H-1B visas, but they have to go through a few more steps to do so.
That’s not a perfect outcome, but it’s better than the
original.