In the latest posting on his blog, Dani Rodrik is saying things that I have been implying in some of my pieces but have been very reluctant to say explicitly, largely because I don’t like the political implications for international trade.
Rodrik’s post, which is titled “Some unpleasant Keynesian arithmetic”, begins by wondering what the effect will be to the US economy of a fiscal stimulus. The answer depends on the Keynesian multiplier, which is equal to:
1 / (1-the marginal propensity to consume * (1 – the marginal tax rate) + the marginal propensity to import)
He estimates the multiplier to be 1.8 (in other words a $1 fiscal stimulus would increase US GDP by $1.8), and wonders if there were any way to increase it.
In fact you can. It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8). Yes, yes, import protection is inefficient and not a very neighborly thing to do–but should we really care if the alternative is significantly lower growth and higher unemployment? More to the point, will Obama and his advisers care?
Being the open economy that it is, I fear that the U.S. will have to confront this dilemma sooner or later. In an environment where the dollar has already appreciated against the Euro and even more significantly against emerging market currencies, fiscal stimulus here will produce an even larger current account deficit. If American consumers decide to spend 40 cents of a dollar of additional income on cheap imports from China and other foreign countries, the multiplier will be a mere 1.3. How long will it take before politicians of all stripes cry foul over the leakage through the trade account and the “gift to foreigners” that this represents? And they will have Keynesian logic on their side.
The way out of this dilemma is to get the rest of the world to engage in fiscal expansion at the same time–so that the gift is returned. The good news here is that China is playing along and hopefully the Europeans will too (if they can convince Germans to get over their weird obsession with fiscal conservatism).
Inevitably when I mention Keynes I get hate mail, and I don’t want to discuss whether or not everything Keynes said is gospel truth or vicious lies, but the fact is that even for non-Keynesians the US trade deficit can be seen to spread the effect of any US fiscal expansion out to the rest of the world, via its trade partners. An increase in US demand is shared between US producers and foreign producers to the extent of the trade deficit.
In a simple two-country model of the world, this means that an equal amount of US and Chinese fiscal expansion will contribute more to Chinese GDP growth than to US GDP growth. This is fine as long as no one notices or cares, and as long as Americans are comfortable with running up the fiscal deficits needed to pull both US and Chinese growth, but like Rodrik I find it hard to believe that this is not going to be a source of heated debate in the trade-deficit countries of the world, especially as China continues to lecture the US on repairing its profligate ways. Yesterday’s People’s Daily, for example, reported the following comments by Governor Zhou of the PBoC:
Zhou said excessive U.S. consumption and over-reliance on debt were key reasons for the crisis, and he urged the United States to raise its savings rate and reduce its budget and trade deficits.
Needless to say, he is right, but I am not sure policymakers here fully understand the consequences for China. From the inevitable retort that it was precisely US profligacy that kept the Chinese economy running, it is likely to be a very short intellectual jump to argue that an end to US profligacy must mean an end to the massive US trade deficit, which if that happens means that domestically the US can experience the expansionary impact of rebalancing trade while China will have to deal with is contractionary impact – in payment for the many years in which it benefited.
The fact is that “rebalancing” trade (a code word for eliminating trade deficits, usually through mercantilist policies) is likely to be expansionary for deficit countries and contractionary for surplus countries, and certainly the experience of the world’s leading surplus country in the 1920s, the US, suggests that trade “rebalancing” was a disastrous experience. I have had a number of conversations with US and European officials in the past two weeks, and I get the impression that there is going to be a substantial hardening, especially in Europe, of positions on international trade, and I suspect that European officials are nowhere near as committed to keeping the market for global trade open as American officials are, but even American officials will turn against trade if popular discontent rises enough.
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The reason that I am very uncomfortable with the whole line of reasoning Dani Rodrik, I and others have been following is that I do firmly believe that active international trade is in the long-term interests of the world, and especially in the long-term interest of very poor countries like China. In the short term, however, I think it would be dishonest to say that reducing trade cannot create any benefits – it can help many trade-deficit countries struggling with insufficient domestic demand by diverting domestic demand that used to go abroad.
I know I am going to be criticized for making this point, on the grounds that I am fanning the flames, but the fact is that the world doesn’t need me to make the connection – already it is starting to be widely discussed, and by next year it will be a major topic of debate. In fact if China does decide to engage in Smoot-Hawley- with-Chinese-characteristics, as the US did in its trade surplus days in 1930, and for which there is a great temptation in China, the results are a little too easy to predict.
Yesterday’s People’s Daily published a call to combat protectionism, but I have the worried feeling that for many Chinese policymakers “protectionism” means things the US and Europe do to limit China’s exports. It does not mean things China does to boost exports, which is seen as a purely domestic issue.
But of course from a global balance of payments point of view all of these things are forms of trade interference. That is why I am so worried that we are going to end up is a nasty trade dispute. Here is the People’s Daily article:
China and the US need to be persistent in their fight against protectionism amid the global economic turmoil, Minister of Commerce Chen Deming said yesterday. The crisis has spread from the financial sector to the non-financial sector, Chen said. And China’s manufacturing and exports sectors have suffered because of the falling demand worldwide since October.
The fight against protectionism, removing trade barriers and pushing forward the Doha round of WTO talks are the top concerns of the two countries at the fifth Strategic Economic Dialogue (SED) in Beijing. The US trade representative Susan Schwab corroborated Chen, saying the US had maintained its stance of trying to remove trade and investment barriers and to combat protectionism at the SED. China’s reform and opening up have helped the country maintain a fast growth rate, Chen said. “WTO members should act against protectionism by adhering to WTO rules.”
“China will continue to show good faith in the WTO, and we hope the US side does the same,” Chen said…China is particularly concerned over four aspects of trade barriers and protectionism – free trade of textile products, expanding high-tech products trade, its market status, and the misuse of anti-dumping and countervailing measures, Chen said.
Meanwhile the Chinese government is still talking about its own fiscal stimulus which, I am absolutely convinced, is the best policy option for China and the world. According to an article in Thursday’s Xinhua:
The government Wednesday unveiled a raft of measures to encourage lending by financial institutions to infrastructure projects, small businesses and potential home and car buyers. Also, an extra credit volume of 100 billion yuan ($14.6 billion) will be provided to three policy banks this year to prop up economic growth amid the worsening global financial crisis.
An executive meeting of the State Council, or the Cabinet, presided over by Premier Wen Jiabao, also said steps will be taken to help financial institutions better ward off risks. Banks, securities firms and insurers should take coordinated action to play a bigger role in supporting economic growth and contributing to industrial restructuring, it said. In the face of the global financial crisis, it is imperative to implement a “pro-active fiscal policy” and “a moderately easy monetary policy”; and the financial sector should play a bigger role in economic development, the meeting said.
There are still a lot of problems with the current fiscal plans and I suspect that they will be significantly expanded in the coming months. Thursday’s South China Morning Post had an article which mentioned some of the difficulties in assuming that the relationship between bank financing and government financing will stay constant:
At first glance the mainland’s 4 trillion yuan (HK$4.5 trillion) fiscal package seems a veritable feast for banks feeling the pinch from a slowdown in the world’s fourth-largest economy. With credible commercial lending targets scarce amid the severest economic downturn for three decades, government-funded projects are theoretically a safe haven for those banks whose profitability relies on loan quality and lending growth. Many of those lenders have publicly expressed their interest in the scheme just as they have pledged to support national programmes to help the country pursue political, economic or social development.
But bankers and analysts argue that the feast on offer is not as big or as appetising as it appears. While banks are expected to compete for some central government-funded projects, they are likely to regard those backed only by local governments with greater caution. “In the past, one yuan of government investment could attract several yuan of bank loans,” said Qiu Zhicheng, a banking sector analyst with Shanghai-based Haitong Securities. “But this time, I’m afraid it might only be able to attract one yuan. Banks will be very cautious to fund local government projects.”
We all worry that the fiscal expansion is not going to be sufficiently large and quick to avoid a downturn, but the real fear, as I discussed in my last blog entry, is the increasing talk of depreciation as one of the ways to get some extra kick in the fiscal stimulus package (via a version of Keynes’ multiplier). Later today the Guanghua Students Monetary Policy Committee is going to debate whether or not China should devalue the RMB, and I suspect that this debate is being held in a lot of other places. The good news is that officially, there is no consideration of such a policy. According to an article in Fridays’ People’s Daily:
The recent depreciation of China’s currency against the U.S. dollar was normal and China won’t rely on a weaker yuan to boost exports, Commerce Minister Chen Deming said on Thursday. “The recent small fluctuation of the yuan against the dollar was completely normal. I’d call it the dollar strengthening, rather than the yuan depreciating,” Chen told reporters at the fifth China-U.S. Strategic Economic Dialogue (SED).
“Dollar strengthening” rather than “yuan depreciating” is a distinction a little too fine for me to understand, but Minister Chen goes on to affirm the strong RMB with some hedging:
The yuan has since gained more than 20 percent versus the U.S. dollar as a result of market forces, Chen told reporters. The currency had been stable since mid-September, when the financial crisis that originated in the United States worsened and increasingly began to affect the world, he noted. It will remain stable if there is no big change in the international economic environment and all countries work together to respond to the crisis, he said.
How to define “all countries work together” is going to be a little tough, but I read this to mean that as long as nothing happens, nothing will happen. This is not totally comforting, but remember that traditionally the Ministry of Commerce has been seen as an important constituency for depreciation, so maybe it is only to be expected that he will hedge on the topic. Thursday’s People’s Daily had an article that was a little more complicated. On the one hand it said:
The steep fall of the yuan this week does not signal a major shift in the country’s foreign exchange policy or its long-term currency revaluation trend, analysts said.
“Analysts” is one of those terms the People’s Daily loves to use to confirm views with which it is sympathetic, without specifying who the analysts are, and the consensus here is that this is the newspaper’s way of putting out the official position – by attributing it generically to “analysts” or “experts” (and who would want to disagree with an expert?). But ominously enough, in the same article they say:
But the yuan should not rise too fast because that would hurt exporters, who are already reeling under the impact of the global financial crisis, said Lian Ping, chief economist of Bank of Communications.
And at the very end of the article, they bring in the experts:
Experts have said the yuan should be revaluated slowly – or should even be allowed to fall – to help exporters and make the stimulus package more effective.
Commerce experts, surely. Not balance of trade experts.
But the protectionist policies in the US would lead to inflation, because cheaper goods from China would be unavaible. And that would certainly decrease standard of livings of US citizens. In the short run the higher trade deficit in the US (via the fiscal stimulus) the better for their citizens, because their can get cheap chinese goods for nothing (cost of production of US dollars is basically zero).
In the long run the cost is also on the chinese side because they risk of massive devaluation of us dollars and that could lead their trillions of us dollars reserves to be worthless pile of paper.
Great post as usual. I hope that “BALANCED TRADE” becomes the mantra of the new administration, as the current US trade deficit is arguably the most important foreign and domestic policy issue the US faces.
I want to correct a mistake I made in an earlier comment last week. I said that in Findlay and O’Rourke’s book “Power and Plenty” they argued that those countries prior to the depression who were most eager to withdraw from international trade were those countries running persistent trade deficits. I got the book wrong. Jeffry Frieden makes this point in his also excellent book “Global Capitalism: It’s Fall and Rise in the Twentieth Century”. Page 196 I think.
I’m less worried about this. The problem here is that for this line of reasoning to have political traction, you have to connect this with people’s personal and for most people in the United States, their jobs are too connected with Chinese trade to make it easy for any politician to put it in terms of “us” versus “them.” Also, it is very hard to do anything major unless the US either leaves WTO, and I don’t see that happening without things getting a lot worse than they are.
I lot depends on how deep the downturn is. If it lasts for one year, then people won’t be that interested in radical solutions. If it lasts for five, then all bets are off.
The other thing is I’m try not to be too ideological. If tariffs work, then I’m pro-tariff. If they don’t, then I’m anti-tariff. In general, they don’t work, but they might in specific situations, and I try to be willing to change my mind as new data comes in.
In the case of tariffs, I can see them working if they protect employment in a specific industry, and the US/China discussion on the Multi-Fiber Agreement might be a good way of modeling future discussions. The problem right now is that it is hard to come up with industries which benefit from that.
Also, having trade barriers against one country won’t help fix this problem. You need trade barriers against everyone, and at this point that would so much disrupt the economy, that I don’t think it is likely without a long lasting downturn.
The other thing is that it illustrates how the important thing is that China runs its economy well. If we get into a situation in which the US needs massive stimulus, but China does not, then at that point what will happen is that China will need to contract its money supply, at which point the balance of payments shifts to the US.
The problem for the status quo is that it is the result of decades of ignoring the plight of American workers whose jobs were outsourcd/offshored, as American manufacturing has been hammered by the strong dollar.
That means what has built up in America’s domestic political economy is a crisis in employment. The debt boom masked it.
Americans have been promised new and different jobs to replace the high paying old ones, and they have not materialized. We got debt instead.
With the debt bubble collapsed, what will emerge as the next crisis is a panic around jobs. This will make the current globalization ‘free trade’ status quo unsustainable.
China has excused its mercantilist policies as required to grow employment enough to prevent social unrest. The USA may soon have reason to employ the same argument.
This article communicates a good sense of the situation:
http://www.nybooks.com/articles/22155
Any comments on the Paulson meeting with the Chinese. Has Paulson given up and is leaving it to the next US admin. to tackle the currency issues? If the Chinese currency depreciates significantly through Jan. 20, the Obama admin. will have the perfect setting. Hope it does not happen.
Tom, I am not sure inflation is what everyone is worried about. At any rate protectionism leads to a diversion in trade, not inflation. If the price of a basket of goods rises in a monetary environment that is not inflationary, it doesn’t create inflation because it diverts demand from other goods, thereby putting downward pressure on their prices. On average prices will remain the same, although some will rise. By the way I am pretty sure their reserves will not become a worthless pile of paper. I don’t know why this is such a popular claim on the blogosphere, but it doesn’t make any sense at all.
Brian, “balanced trade’ too easily becomes trade manipulated to protect powerful constituencies, and I certainly don’t want to suggest that I support protectionism. Very productive countries with flexible financial systems benefit from liberal trade regimes. I expect that in a decade Europe, Japan and China will need to liquidate their holdings of US securities to finance their very ugly demographic adjustments, and so will be running trade deficits against the US. The idea that trade needs to be balanced in the short term is hard to justify. The US trade deficit is sustainable over the medium term (i.e. it is easily financed) and doesn’t create a huge problem for the US. The problem was not so much the trade deficit per se but rather the way it was financed and executed – a debt-fueled consumption binge is not sustainable.
Twofish, not at all. If the US were to find that China is manipulating the currency – not a very difficult thing to argue – it has a number of measures which it can force. It is hard for me to understand why you think there can’t be a trade-related outcry in the US and Europe, since there already is one.
Tyaresun, I think the main purpose of the SED last week was to keep it alive into the next administration. As far as I can see not a whole lot got down.
“because it diverts demand from other goods” but that means that the unemployment will have to increase because fewer goods will be sold (or wages will have to go down in sectors that will replace production of chinese goods). So with inflation or without (I agree that it is monetary phenomena) the standard of livings of US citizens will decrease, basically because cheaper chinese goods will be unavaible. It is as simple as that. Besides it is quite common view that cuurent chinese FX policy is at the expence of their people because they are subsidizing US consumption.
And in the long run US (and of course not only US)will have to substanstially depreciate their currencies because they have huge CA deficits with China. So it means that chinese reserves will also depreciate.
And according to Professor Jagdish Bhagwati, “the fact that trade protection hurts the economy of the country that imposes it is one of the oldest but still most startling insights economics has to offer.”
And another quote from Marc Faber made a few yers ago and with current deflationary pressures a little out of sync but in general (in the long run) very true (in a paper fiat money system): “For the US economy, rising protectionism would also mean far higher inflation rates, as well as a huge competitive disadvantage on the global markets for US corporations.”
“Zhou said excessive U.S. consumption and over-reliance on debt were key reasons for the crisis, and he urged the United States to raise its savings rate and reduce its budget and trade deficits.”
My jaw dropped slightly when I first read this, because it is true but surprising coming from a Chinese official given its obvious negative implications for China. Zhou is one of the only economic policy makers who consistently makes sense, which is probably why he has gained so many enemies. I feel a bit sorry for him- he’s been arguing for a stronger CNY for a long time- which would have done a lot of good in preventing the current mess had the currency strengthened back in the boom times, dragged into prescribing policy with two hands tied behind his back (which forced the draconian and inefficient credit controls as a response to inflation), and now is probably getting scape-goated with China’s downturn. He’s like Colin Powell in the run-up and aftermath of the Iraq invasion.
Michael, as for protectionism, you hit the nail on the head (“for many Chinese policymakers ‘protectionism’ means things the US and Europe do to limit China’s exports). As I argued in the previous thread, the US has a far better case for asserting that China has been the protectionist one. Chinese officials calling anything trade-related a “sovereign issue” is particularly galling. How this evolves with the Obama administration coming in is one of the most interesting issues on the horizon. This video is insightful into his thoughts on the issue: http://www.youtube.com/watch?v=dKSJlfoAkso
My guess is that Obama will push very hard on the currency issue early on with lower level talks. However, if these are met with resistence my guess is that Obama persues this through the WTO, given his appreciation of multi-lateral institutions (rather than protectionist legislation in Congress). I also wouldn’t rule out the new Treasury labelling China a currency manipulator at some point (which Paulson feebly turned into taboo despite the fact that China obviously is one).
There was a massive global misallocation of capital. The US over-consumed and the rest of the world, whether China or commodity exporters overproduced (in either price or volume terms- ie. revenue terms). In the US we see this now in a banking crisis. But if the US trade deficit, as created by Bretton Woods II, was one of the primary sources driving the current crisis, as I believe, we shouldn’t be too surprised to see enormous losses (or possibly banking crises) on the flip-side of this. My worry is that the US and Europe push for less currency manipulation by China at the same time the Chinese economy is going through hard times will at some point be spun by the Chinese government and media as another attempt in the long history of Chinese humiliation at the hands of foreign powers (that oldie but goodie!). Given that historically there has always been one sure-fire way to spur domestic demand- militarization, I can’t help but think that the probability of some truly undesirable scenarios has increased. Luckily we’re still a long way from there and I’m hopeful that Obama can manage this challenge sensitively and diplomatically.
Yuan Watch : Chinese mouse trap
It was reported that Obama spoke with Hu Jintao, the Chinese President, and emphasized his willingness to ‘further strengthen constructive relations between China and the US.’
Given that I share both a political (uberliberal with a moderate mask) and a geographical persuasion with Obama Smartypants let me try to handicap what these ‘constructive relations’ might be.
Obama hinting to the Chinese that a small devaluation of the yuan would be acceptable in these troubled times is the uberliberal version of a Chinese mousetrap.
Enacting trade protections in order to keep those stimulus dollars on the homefront is much easier within the context of China stealing manufacturing jobs with a manipulated currency.
The Chinese would be wise to see yuan appreciation as an insurance premium to allow export access.
My bets though are now on the cheese being too tempting.
Posted by Anonymous Monetarist at 8:10 AM
mpettis: It is hard for me to understand why you think there can’t be a trade-related outcry in the US and Europe, since there already is one.
I can’t say anything about Europe since I don’t live there, but my “look on the street and tell me what you see” view of the United States is that China-related trade is unlikely to be a hot issue unless things get a lot worse than they are.
Anti-trade sentiment in the United States is confined to specific groups that have either very little political support or are not willing to push the issue strongly. People who complain about trade are for the most part interested in other things, which they have mostly gotten. (The Multi-fiber agreement by Graham and Schumer.)
Something that I think illustrates this is that no American politician has even tried running on an protectionist platform since Gephardt did in 2004, and he did horribly in the primaries. If there was any sort of anti-trade sentiment in the United States, we would have seen it in the last elections, and we haven’t. The traditional defenders of protectionism have been the trade unions, and demographic changes have changed their positions. The only other groups are neo-conservatives and interventionist human rights groups, and they have been discredited by Iraq.
Just to make the point, if you can name five Congressmen or journalists that could lead the anti-trade push in the US, we can focus on them. The only one I can think of is Lou Dobbs.
Politics can change, but it will need about two or three election cycles before I can see you getting any sort of serious anti-trade sentiment in the United States.
Again, a lot of what I’m seeing is certainly colored by what parts of the US I’m seeing, so I’d be interested if someone with first hand information is seeing something different.
@sharpe_mind
I can certainly not handle English in such a way to argue the way you do. But let me say that I agree on every single word you used on your latest post.
The Chinese government has already implicitly made the Rodrick argument by reiterating that its own stimulus package will be a domestic one. The stress put the domestic nature of this spending implies that where possible domestic sources will be preferred to foreign ones for capital goods, for example. In other words, this could well be import substitution for China a la fiscal stimulus. This might sting for companies like CAT, high speed rail manufactures and other heavy industrial firms in the OECD. However, in the end the effects will be strongest in the form of the looming capacity correction in supply chain economies in China’s periphery.
With respect to the Chinese currency, a slight devaluation relative to the USD is nothing compared to either the depreciation of the won or the appreciation of the yen in recent months. Beggar-thy-neighbor policies are simply impractical, but “encouraging” companies to buy domestic is certainly not.
Tom, no, it means that unemployment should decrease. The short-term purpose of trade protection (one can argue about its long-term effects) is to divert domestic demand from foreign goods to domestic goods. This requires an increase in domestic production, which requires more factories hiring more workers. Yes, a low RMB means Chinese workers subsidize US consumption, but they are willing to do so precisely because it boosts employment in China. Although I subscribe broadly to Bhagwati’s view, it is not always true. In fact I cannot think of any country in history that has gotten rich through productivity gains (I exclude very small city-states like HK and Singapore or commodity-rich countries) that did not rise during a period of significant trade protection. That doesn’t mean it is always a good idea. I think Adam Smith argues that free trade is always good for countries with high levels of productivity, but not necessarily for others, and I suspect that may be right. Faber is only right when there is little excess capacity. That is not our problem today. Look at the 1930s. – high protection and deflation.
Sharpe_Minde, thanks for the video. There is a lot of pressure on the Obama administration to resolve the problems in statesmanlike ways that set the stage for good growth in the future, but I sense a coming increase in frustration. I do not think Chinese officials see the problem in the same way that US and European officials do, and that is going to cause trouble.
Anon Monetarist, I am not sure of the gaming issues, but I do agree that China should see appreciation as a way of putting off other trade pressure and giving everyone time to find an optimal solution.
Twofish, you are obviously not talking to the American and European journalists and government officials that I do. Everyone seems to think that trade is going to be a problem, and many are far more pessimistic than I am. Protectionism is rarely an issue when the economy is booming. Q very cursory glance at economic history suggests that it is always a problem when the economy is slowing.
I’m sorry but there’s something that doesn’t sum up. Basically we have three variables under consideration: inflation, unemployment and wages. If monetary environment is stable than there would be no inflation (I agree on that), but what about two others variables? If money supply is stable and citizens want to buy the same amount of goods (to not decrease their standard of livings) than wages will have to fall in order to suppress the rise of prices (which before trade tariffs were a function of low Chinese wages). If wages will not fall than the unemployment will rise, because existing money supply will be insufficient to buy the same amount of goods as before tariffs but with higher prices. Moreover even if wages will fall than the amount of goods (with old pre-tariffs prices) that US citizens will buy will also decrease because aggregate wages will be lower than before tariffs. And that’s the crucial point: Chinese are gifting US consumers with “free” goods, so with tariffs these gifts will go away. There’s nothing that the US consumers can gain on tariffs.
Now let’s assume that we will increase domestic production in order to decrease unemployment and hire more workers. First if these factories were able to produce as cheap as Chinese than tariffs would not be necessary. Secondly in order to invest we need savings: either domestic or from abroad. I don’t believe in domestic savings simply because expected rise of personal savings will be used to pay people’s debt and financial institutions will use this cash to decrease their leverage ratio and not to increase investment lending. And borrowings from abroad are (1) not sure (every country will use them for domestic purposes and deleveraging is everywhere) and (2) put US into risk that if these investments fail (will not be competitive with foreign factories in the long run) than the only result will be increased foreign debt of US (which will put another pressure on US currency).
But I agree that there’s overcapacity in China and overconsumption in US. But in order to rebalance these inequalities US workers would have to lower their standards of livings to be more competitive. Closing the borders will only hurt other consumers. So in my opinion there ‘s lose-lose situation for US (and Europe also). And during 1930s there was also high unemployment in US and tariffs only worsened situation.
The Mckinley Tariff of 1890, The Smoot-Hawley Tariff (1930) and the 10% improt levy with non convertibility of US dollars to gold in 1971 were three occasions where we tried trade protectionism in a big way. Could you elaborate on the consequences?
Twofish
IMHO, you’re entirely correct in your assessment that there’s no political appetite for “protectionism” in the US. The problem is in the definition though. Politicians and regulators will profess their undying enthusiasm for free trade while taking many and varied actions which just happen to benefit domestic production. Helping Detroit make payroll with cash isn’t quite the same thing as adding a tariff on imports, but it isn’t all that far off. Maybe country of origin labeling makes sense on its own merits, but it does just happen to effectively discourage imports.
Even in good times, lots of these sorts of things get implemented. As pressure builds on US producers and layoffs mount, I expect a flood of lobbying for measures that, while not called protectionism, have the effect of supporting domestic production and/or making life more difficult and expensive for importers.
Michael: Twofish, you are obviously not talking to the American and European journalists and government officials that I do. Everyone seems to think that trade is going to be a problem, and many are far more pessimistic than I am.
I don’t know about Europe, but I think they are quite wrong about the United States assuming that you don’t have a total economic collapse. I don’t think that those journalists and government officials appreciate the degree to which globalization has sunk some very deep roots into the American economy.
Basically, most people vote their job, and if they think that protectionism will save their job or get them a job, they’ll vote for it. If they think that protectionism will destroy their job, they’ll vote against it. My sense is that there has been a major shift in employment patterns so that most people in the United States see them losing under protectionism than gaining.
Politicians and journalist often tend be left behind these sorts of trends.
Michael: Protectionism is rarely an issue when the economy is booming. Q very cursory glance at economic history suggests that it is always a problem when the economy is slowing.
There wasn’t a huge amount of protectionist sentiment the last major recession in the United States 2001-2002. Given a recession that is deep and long enough then anything is possible, but it will take some time for things to develop.
The reason I wondered if you can list five politicians or journalists that are protectionist is that in order to develop quickly you need people that provide ideological and political leadership, and it’s very difficult for me to see who might provide that sort of leadership.
If you have lots of politicians and journalists that are worried that someone is going to fly the banner of protectionism, that doesn’t worry me. What would worry me is if you can point to a large number of politicians and journalists that are *happy* at the prospect that this crisis will provide the political push that they need to adopt protectionist policies.
If you do know Congressmen that are in that camp, I’d like to know who they are so that I can keep track of them.
Wonder if this is the epitaph to China’s yuan story in 97/98. After all, China stood up and refused to devalue then, claiming later that in doing so, it ameliorated the crisis. Now however, pressures are very different. Just think, devaluing might be advocated by export oriented factions in addition to those who think the sinking dollar is adding loss upon loss for Chinese investments, but question is could wit herald in a round robin decline in currencies all round, avoiding the word spiral but there it is. Here’s the dumb one awaiting wisdom from the wise!
There may be some sort of implicit and almost accidental deal that is coming up, which is that the US government doesn’t complain about trade deficits and suggest tariffs, and in exchange its trading partners doesn’t complain about subsidies to domestic businesses. Someone in this board mentioned the “new Smoot-Hawley” which consists of domestic to local businesses and restrictions on capital investment on foreign businesses, and I think the “new Smoot-Hawley” will remove the need for the “old Smoot-Hawley.”
Something else to notice is that in the United States “nationalization” is far more a taboo than “protectionism” ever was but that hasn’t kept people from moving very quickly to do it.
Geoeconomist, throughout the 19th century the US pretty much had the highest tariffs of any major industrial nation. The basic theorizing behind tariffs was established in Alexander Hamilton’s Report on Manufactures, presented to Congress in 1791, in which I think he used the phrase “infant industry” for the first time ever. His system, which a few decades later became known as the “American” system, inspired German economist Freidrich List (in exile in the 1830s in the US) who later became the “father” of the Prussian economic system after 1870, which later inspired Japanese economic policy.
The basic infant industry argument claims that countries with low levels of manufacturing productivity can benefit from protectionism until they are competitive enough to compete with the more advanced countries, in which case trade protection becomes a hindrance, not a benefit. Whatever one believes about that claim, it suggests that there is a big difference between protection for an advanced country and protection for a developing country.