Kozlowski: Protectionism a road to economic ruin

‘ ‘ ‘ The Group of Seven is not considered particularly sexy or exciting, unless you are the… ‘ ‘ ‘ The Group of Seven is not considered particularly sexy or exciting, unless you are the type of person that has a pinup of Ben Bernanke in your dorm room. However, who says that the news is always boring, and that People magazine cannot cover it? Japan’s now-former finance minister Shoichi Nakagawa seemed to grasp for a People feature article, or maybe even National Enquirer, by appearing drunk at a press conference at the G7 summit in Rome. He denied being drunk, and Japanese Prime Minister Taro Aso denied ever knowing him, possibly more than three times before the morning rooster crowed. ‘ ‘ ‘ Given the state of the economy, quite a few finance ministers probably wouldn’t mind a good stiff drink. Economic indicators look rather alarming all over the world, and even Mr. Hope himself, President Obama, has sounded glum about the economy. ‘ ‘ ‘ Whenever an economy goes sour, there is a demand for the government to act. With fewer greenbacks to go around, a green-eyed monster, which slumbers fitfully during times of economic prosperity, roars to life. Protectionism, the belief in trade barriers, rises again. ‘ ‘ ‘ We have already gotten a whiff of protectionism from this administration, from campaign promises to renegotiating NAFTA to the unfortunate ‘Buy American’ provisions of the latest fiscal stimulus package. Protectionism is a vote-winner, particularly in Rust-Belt states such as Ohio. It seems to make sense: Let’s stop creating jobs in China by buying stuff from China and somehow miraculously transfer those jobs back here by buying stuff from the United States instead. Protectionism is time-tested. ‘ ‘ ‘ And protectionism is wrong. ‘ ‘ ‘ There is a whole raft of problems with resorting to tariffs and other trade barriers in a time of global recession, and these are not only theoretical. A major contributor to the Depression was the Smoot-Hawley Tariff Act of 1930. Never has a bill both had such a great name and caused such catastrophic effects. ‘ ‘ ‘ The Smoot-Hawley Act raised protective tariffs to record levels. Angry at being denied access to U.S. markets and fearful of trade deficits, our trading partners retaliated in kind. As a result, U.S. exports fell off the table. Suddenly, our exporting industries had nobody to export to, which forced them to lay people off. This exacerbated the economic contraction on both sides of the Atlantic and helped throw the economy into the tank until its final recovery after World War II. ‘ ‘ ‘ There are already indications that tariffs, ‘Buy American’ provisions and other such measures might provoke a retaliatory backlash. The Canadian government reacted with quite a bit of anxiety over Obama’s promise to renegotiate NAFTA. The recent Davos Forum featured politicians denouncing protectionism, which, practically speaking, suggests they feel pressure to protect domestic industries. Unilateral action by the United States might give politicians a ready excuse to abandon those denunciations. ‘ ‘ ‘ It seems ironic that political liberals, the very people who blamed George W. Bush for destroying U.S. relations with the rest of the world, are usually the people who argue for protectionism. A rush to protect causes a drying up of world trade, and it substantially harms the credibility of the United States abroad. ‘ ‘ ‘ We have committed to a series of organizations and treaties that are all about expanding free trade. NAFTA, CAFTA and the WTO are obligations, not just a collection of cool acronyms. Ditching them sends the message that we might abandon future agreements when it is politically expedient to do so. It also smacks of hypocrisy, as the United States has led the charge for free trade for over a generation and repeatedly urged other countries to open their markets to us. ‘ ‘ ‘ Tariffs against China in particular might touch off a powder keg in the Far East. Some 20 million migrant workers were laid off in China, and there are signs that China’s economic growth, based largely on exports, is flagging. U.S. trade barriers might push the Chinese economy over the brink. ‘ ‘ ‘ This is problematic. The government has long let a booming economy distract from the need for political reform. The potential for social unrest in China is vast. If disobedience erupts, the Chinese government might institute even more repressive practices, or it might focus so much on maintaining control over its own people that it is unable to contain North Korea. It is also possible the Communist Party would sanction aggressive action toward Taiwan as a way of building national solidarity. ‘ ‘ ‘ With any luck, the Obama administration will ignore the considerable pressure it likely faces in the coming months. If not, we might all end up as dazed and confused as that former finance minister. E-mail Mark at kozthought@gmail.com.