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article imageOp-Ed: U.S. Protectionism, Economic Advantage and the Domino Effect

By Bill Jencks     Feb 4, 2009 in Politics
Protectionism is a dangerous route for any country to take, and particularly in these thin economic times. Even the excuse of national economic survival is not enough to support the eventual and inevitable harsh effects of tit-for-tat protectionism.
As Obama steps up to the plate to become US President, and with the world still twisting in agony from the turbulent and never-ending Financial Crisis, what will he do to assure US business and industry ? Will he maintain the Free Economic Markets ? Or will he be forced to throw in the towel and raise the barriers of US Protectionism ?
Recently, President-elect Obama said, "China must change its currency practices. Because it pegs its currency at an artificially low rate, China is running massive current account surpluses. This is not good for American firms and workers, not good for the world." Which is all perfectly true. Now ask yourself why China is doing this - obviously to maintain price supremacy in her markets. What does China say in reply ? China already must be aware of both the economic and political advantages that the US economy has had for many years now (see my article The Washington Consensus: Echoes from the Swamp for a full description and reasons). She has already complained and warned that America should manage her own volatile trade dollar properly and has already stated that if America installs protectionist policies, then China would be forced to both dump her trillions of dollar reserves as well as implement protectionist policies of her own.
From an article in the UK Telegraph by Ambrose Evans-Pritchard, business editor:
There has been much talk lately of America's Smoot-Hawley Tariff Act, which set off the protectionist dominoes in 1930. It is usually invoked by free traders to make the wrong point. The relevant message of Smoot-Hawley is that America was then the big exporter, playing the China role. By resorting to tariffs, it set off retaliation, and was the biggest victim of its own folly.
Britain and the Dominions retreated into Imperial Preference. Other countries joined. This became the "growth bloc" of the 1930s, free from the deflation constraints of the Gold Standard. High tariffs stopped the stimulus leaking out.
It was a successful strategy - given the awful alternatives - and was the key reason why Britain's economy contracted by just 5pc during the Depression, against 15pc for France, and 30pc for the US.
Could we see such a closed "growth bloc" emerging now, this time led by the US, entailing a massive rupture of world's trading system? Perhaps.
This crisis has already brought us a monetary revolution as interest rates approach zero across the G10. It may overturn the "New World Order" as well, unless we move with great care in grim months ahead. This is where events turn dangerous.
The last great era of globalisation peaked just before 1914. You know the rest of the story.
I also find it peculiar that, apart from India's and China's successful economic emergence, all the rest of the Asian countries who have joined the WTO continue to flounder under the grossly unfair rules, regs and penalties of both the IMF and the World Bank. And then when you look at the performance of countries like Malaysia, Singapore, Indonesia, The Philippines and Thailand who have all the so called 'advantages' of this Western run financial club, it is very odd indeed that the two Asian countries doing by far the best in terms of economic potential - and who are not members of these economic US clubs - are India and China.
It has also been supposed that Obama's inner cabinet is full of "free traders". This can hardly be said to be the case in regard to Geithner, who, though certainly competent and necessary for continuity, is certainly a Protectionist according to his recent reported activities with Bernanke's economic alliances:
Both the [Washington] Post and [New York] Times told readers that President Obama picked an economic team committed to “free trade.” This is not true.
The top members of President Obama’s team, and certainly his Treasury Secretary designate Timothy Geithner, supported the use of federal funds to bail out the banks. Giving $350 billion in loans at below market rates (coupled with government guarantees for deposits) was a massive subsidy to U.S. banks that give them an enormous advantage in international competition. Such subsidies are a clear form of protectionism.
While these officials may want to call themselves “free traders,” it is not an accurate description of their approach to economic policy and the media should not use it except in a quotation.
For clarity, Protectionism may be defined(Wikipedia) as :
"...The economic policy of restraining trade between nations, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other restrictive government regulations designed to discourage imports, and prevent foreign take-over of local markets and companies. This policy is closely aligned with anti-globalization, and contrasts with free trade, where government barriers to trade are kept to a minimum. The term is mostly used in the context of economics, where protectionism refers to policies or doctrines which “protect” businesses and “living wages” within a country by restricting or regulating trade between foreign nations."
President-elect Obama has complained about China's unfair currency advantage. Perhaps he should avoid stepping on The Dragon's Tail and read the book - Super Imperialism: The Economic Strategy of American Empire by Michael Hudson, an American - before he complains about the unfair economic tactics of China. And perhaps he should also study Murray Rothbard's The Case Against the Fed for some more truth and enlightenment concerning the blatantly unfair economics of the World Reserve Dollar.
I'm all for a level economic playing field myself in the World Markets and, after all, this is what Free Market Capitalism is all about, isn't it ? If Obama does not adhere to a free trade, anti-protectionist policy, then this will perhaps be perceived by the rest of the world as the worst kind of economic advantage. And in the current economic trade/currency war that gently seethes between the US and China at the moment, one wonders who will get hurt more if protectionist policies are implemented - China or America ? Let us not forget that China - with currently $2 trillion in her dollar reserves, could easily bring both the dollar and the American economy down easily if she diversified her reserves into Euros and Yen. Then you would see a rage of US hyperinflation not seen since the heady days of The Weimar Republic of the 1920s.
Clearly, China now has both the economic and political advantage here, and therefore President Obama must tread very warily indeed.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of DigitalJournal.com
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