Tariffs And Their Consequences

by Pejman Yousefzadeh on September 13, 2009

Commenting on the report about the Obama Administration’s foolish decision to impose tire tariffs, Irwin Stelzer discusses the likely consequences of the President’s decision to be a protectionist:

So picture this. Obama now has to play host to a very angry Chinese President Hu Jintao, among other world leaders, in Pittsburgh, to all of whom he promised not to repeat the beggar-thy-neighbor protectionist policies that extended the Great Depression. He needs the Chinese to continue buying the IOUs he is pouring onto the market to cover the deficits he is running up, and to allow their currency to appreciate relative to the sinking dollar. Hu needs export-based jobs. The Obama charm might just not be enough to send the Chinese president home in a generous mood, or disinclined to continue his ruminations on how to free the world of the dominance of the dollar.

Obama’s decision on tires makes it clear that he has no intention of supporting efforts to revive the almost 8-year-old Doha trade-opening negotiations. Some 36 nations met in New Delhi earlier this month and professed interest in completing a deal by the end of next year. Not likely: the recession has made jobs, jobs, jobs politicians’ central concern, and few are prepared to take the flak that will surely arise if they open their markets, and expose even a few domestic companies or farmers to job-destroying competition. The talks collapsed in July of 2008 precisely for that reason. Obama has been sitting on proposals for bilateral free trade agreements with Colombia and Korea, among others, and sees no reason to antagonize the strong, protectionist wing of his party, already unhappy with his failure — so far – to throw his weight behind a bill that would end the secret ballot in union-recognition elections, and require compulsory arbitration when union-management negotiations break down.

He will have to find some way to placate Canadian Prime Minister Stephen Harper. Some 250 Canadian manufacturers have been effectively excluded from bidding for infrastructure work in the U.S. by the “Buy American” provision of America’s $787 billion stimulus program, and Harper was not satisfied with the president’s typically opaque pronouncement at an earlier meeting, “It [Buy American] was not something that I thought was necessary, but it was introduced at a time when we had a very severe economic recession. We have not seen some sweeping steps towards protectionism.” Harper intends to raise the issue again in Pittsburgh. And remind the president that the North Atlantic Free Trade Agreement prohibits just such restrictions on Canadian goods. Now, it is clear that Harper can huff and puff, but he is unlikely to blow down the protectionist wall that the president is erecting.

[. . .]

All of these battles are merely skirmishes in a much broader battle. Almost every country is seeking to export its way out of the recession. Germany is relying on its exporters to create jobs; China is depending on its export machine to keep its economy growing fast enough to create millions of jobs and avoid social unrest; Japan’s new government, no longer reflexively pro-American, also needs exports to end a decade of stagnation. But Obama, in charge of the world’s consumer-of-last-resort, has decided to eschew that role in the future. Indeed, he has had his Trade Representative, Ron Kirk, announce that America will no longer allow its trade partners to “run roughshod over us.” Some of the president’s reasons for pushing exports and tightening up on imports are purely political — he needs the trade unions and his party’s left. Others are more fundamental — he has to cut the U.S. trade deficit lest the value of the dollar continue its descent and add to the inflationary pressures created by his enormous deficits.

In short, free trade and the economy are screwed. I don’t understand what the point is of enacting a $787 billion stimulus package, when the Administration’s tire tariffs decision only serves to increase the chances of a trade war that would harm economic growth in the long run. But then, I never bought into the HopeAndChange rhetoric or its attendant Audacity of Self-Defeating Measures.

UPDATE: Kudos to Brad DeLong, who calls shenanigans on the Administration’s decision to impose tariffs. Too bad other port-side bloggers are either defending the indefensible, or pretending that this sorry chapter in American trade policy just never happened.

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