The Magazine

The Ghosts of Smoot and Hawley

Opening skirmishes of a new trade war?

Mar 9, 2009, Vol. 14, No. 24 • By IRWIN M. STELZER
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We will know more when the administration moves from general statements to specific actions. WTO regulations contain their own escape clauses, which is why Chen Deming, China's minister of commerce, warns that "caution must be taken even in employing trade protection measures consistent with World Trade Organization rules." The first test of both Buy American loopholes and WTO rules will come when the steel industry files antidumping and other charges against Chinese and other steelmakers. Which it will. "There is no such thing as free trade. All trade is managed," Daniel DiMicco, head of steelmaker Nucor Corp., said to the Wall Street Journal. He might have had in mind India's decision to boost tariffs on steel imports.

As for NAFTA, it now seems that when Obama's economic adviser, Austan Goolsbee, quietly told the Canadians last February to stay calm, campaigning has little to do with governing, he had it right. Obama still wants to incorporate "fairer" provisions in a revised NAFTA agreement, and says he hopes Canadian and American economic teams can come up with environmental and labor-standard rules that "are not disruptive to the extraordinarily important trade relationships that exist between the United States and Canada." But not just now, when the world teeters on the brink of a depression. Which is fine with his protectionist supporters, so long as in the end he delivers on his promise. If he doesn't, "there will be a whole lot of really upset people," warned Lori Wallach, director of Public Citizen's Global Trade Watch division, in the Washington Post.

In sum, Obama is not the out-and-out protectionist he promised to be when wooing the Democratic left, and angry factory workers in Michigan, Indiana, Pennsylvania, and other states. But neither has he been persuaded that free trade is a principle around which he can build his policy. From a free trader's perspective, things are not as bad as it seemed they might be during the primary and presidential campaigns. But not-as-bad-as-it-might-have-been is not the same as a good trade policy. John McCain tried to have Buy American deleted from the bill, and with good reason: Our trading partners are taking that restriction, no matter how many escape clauses it now contains, as an excuse to retaliate.

It is also likely that governors will try to "buy local," and it will be almost impossible to prevent them from rigging their bidding processes to maximize the number of jobs created in their states, WTO or no WTO. The early phases of the spending will likely go to repair work (paint the bridges, fill the pot holes) rather than new infrastructure projects. These will be labor- rather than materials-intensive, so Buy American will not play much of a role. Where it will matter is with so-called "green investments" at the top of the Obama-Pelosi agenda. Most solar panels and wind turbines are manufactured overseas, and domestic manufacturers have full order books. The administration will have to decide whether it wants to place orders with overseas suppliers, who can get the stuff to us relatively quickly, or wait the several years it would take for domestic manufacturers to expand production capacity. My guess is that the impatient greens in the administration, who anyhow do not share Congress's protectionist proclivities, will opt for speed, and push for use of the not-available-in-America provisions of the stimulus act.

We will, of course, never really know whether such protectionist measures as the Obama administration might adopt have a significant effect on world trade, which is shrinking for the first time in more than 25 years as a natural result of the recession: The International Monetary Fund estimates that the volume of global trade will decline 2.8 percent this year, after expanding 4.1 percent last year, with the world's largest exporters, China and the United States, leading the declines. We will never be able to measure whether that shrinkage was due primarily to recession or to protectionist measures.

But we can make some qualitative judgments. Think of trade in three of its aspects--the movement of people, capital, and goods.