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The Folly of Protectionism

Democrats ought to reconsider their desire to hamper free trade.

11:00 PM, Feb 5, 2009 • By IRWIN M. STELZER
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Congress continues to include "Buy American" provisions in the stimulus package, albeit in a watered-down version. This has set off alarm bells in the free trade community. With reason. During his presidential campaign Barack Obama made it clear that he is unhappy with the way the world trading system works -- draining factories and jobs from America. And not because American workers are inefficient, or lazy. Rather, it is because the system is somehow rigged against America, with its free-floating currency and open markets. So he thinks. Or thought. In recent days he said he wants to avoid any steps that would "signal protectionism. That is a potential source of trade wars that we can't afford at a time when trade is sinking all over the globe." Whether he can persuade congress to delete the "Buy American" provisions contained in the version of the stimulus bill now wending its way through congress is not clear -- he is not in complete control of his own party, and Majority Leader Harry Reid is an ardent fan of "Buy American."

Meanwhile, free traders are scrambling for their dog-eared copies of Adam Smith's "Wealth of Nations", and reading to their protectionist friends the great Scot's explanation of the enriching nature of free trade to all parties engaging in it. "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage." To which those who are upset by the costs of freer trade respond by citing Smith's defense of retaliation when it "will procure the repeal of prohibitions" imposed by other nations.

Such "prohibitions" on the free movement of goods and services abound. The EU restricts imports of American chickens and beef, so America wants to levy a tariff on Italian water. France prevents foreigners from taking over any of its "national champions" (including a yogurt maker), and in the current crisis President Sarkozy has told his country's leading manufacturers to confine layoffs to plants located in other countries. (Iowa Senator Charles Grassley took a similar position when he urged Microsoft CEO Steve Ballmer to confine the firm's 5,000 layoffs to foreign workers). In a display of Gaul, French trade minister Anne-Marie Idrac told the Davos attendees that she finds it "extremely preoccupying that one of the first acts of the Obama administration could be a measure [Buy American] that is clearly protectionist and a distortion of competition".

Russia welcomes the inflow of foreign capital, which it then confiscates, cooperates with the OPEC oil cartel to restrict output, is attempting to set up a similar organisation to control natural gas prices, and raises tariffs on whatever products Vladimir Putin decides to protect. Mexico bars American capital from investing in its oil industry. American administrations have at times imposed "voluntary" quotas on the importation of autos, steel, shoes and other goods. Most important to US politicians, China manipulates its currency so as to keep its value down and its powerful import machine humming.

Which is why a rumor circulating in Washington is so interesting. Recall: Treasury Secretary Tim Geithner, during the course of his confirmation hearings, told the senate that he wants to crack down on China's manipulation of the yuan. Tough talk, especially his use of the word that the Chinese hate -- "manipulation". But rumor has it that Geithner informed the Chinese that in order to assure his confirmation he would be using the m-word. And just last week, Geithner safely installed at the Treasury, President Obama hinted that he is unenthusiastic about precipitating a trade war. Perhaps the new administration has decided that a trade war would destroy as many jobs as it would create, and that there are better ways to dampen protectionist pressures.