Tuesday, December 09, 2003
What price free trade?
Posted by David Smith at 08:51 PM
Category: David Smith' s magazine articles

When George Bush experienced the pomp and the protests (although he didn’t see many of those) on his three-day state visit to Britain in November, the hope was that he would also offer Tony Blair a concession on trade.

The hated steel tariff was in place at the start of the president’s visit, however, and it remained in place at the end of it. As you read this, Washington has moved to amend it under the threat of a retaliatory response from Europe, authorised under World Trade Organisation rules.

But nobody should believe that this would mean America had seen the error of her protectionist ways. It is extraordinary that a president at the head of a supposedly free trade administration resorted to protectionist measures, not just in steel but in agriculture. Even more extraordinary is the fact that this has occurred in spite of the tariff being demonstrably ineffective. It has failed to protect the uncompetitive parts of America’s steel industry. And it has meant higher prices for the big steel users, such as the Detroit car giants.

Protectionism has been shown to have the impact the textbooks would predict – a net loss for the economy introducing it, in this case the United States.

It gets worse. When Bush was enjoying his stay in Buckingham Palace his government, far from reining back on protectionism, was increasing it. On November 18 Don Evans, Bush’s commerce secretary, announced that the US Committee for the Implementation of Textile Agreements (CITA) had agreed to impose quotas on imports from China of knit fabrics, brassieres, dressing gowns and robes. What were quickly dubbed the “Bra wars” had begun.

The imposition of quotas on Chinese textiles differs in important respects from the steel tariff. While the steel tariff was unilateral and clearly against WTO rules, those on Chinese textiles were allowed under the conditions of China’s accession to the trade organisation, which takes effect on January 1 2005.

Under those terms, America was allowed to impose annual quotas for up to three years if it believed Chinese imports were hurting its own domestic textile manufacturers. Having decided that the exponential rise in imports (up more than 100% on a year ago) was indeed doing that, the new restriction will limit growth to just 7.5% over the next year.

The fact that America believes it is playing by the rules in the case of Chinese textiles does not help too much in limiting the damage. For China, which provides a sixth of US clothing imports, Washington’s action amounted to the first shot in a trade war. Two days later, China announced it was imposing restrictions on certain imports from America, ostensibly in response to the earlier steel tariff. China has pointed out that the US action did not conform to its interpretation of the transitional arrangements for its membership of the WTO.

The Bush administration’s action is blatantly political. Alabama, Georgia, North Carolina, South Carolina and Virginia, won narrowly by the president in the November 2000 presidential election, are all textile-producing states. Textile employment has dropped by 33% in the past seven years. North Carolina has seen a drop of nearly 80,000 in the number of textile workers. When Levi’s announces it will no longer be manufacturing in America, you know this is an industry in deep difficulty.

Ohio and West Virginia, which also went narrowly to Bush, are steel-producing states. Then there are the steel-producing states the president would like to win in November 2004, such as Pennsylvania.

The trouble is the outbreak of protectionism we are seeing in America is not narrowly political. Both Republicans and Democrats seem too ready to resort to protectionism in order to prevent job losses in industry – factory jobs have fallen in every single month Bush has been at the White House - and keep the powerful manufacturing lobby happy. Free trade is not a popular campaigning slogan in America these days.

The trouble is too that many in America also see an economic argument in favour of trade barriers. America has a huge trade deficit, around $600 billion, $120 billion of it with China. Even if the dollar falls a lot further, the argument goes, it cannot fall far enough to offset the huge cost disadvantage of American textile producers vis--vis China.

This is where it could get very worrying. We have already seen a stalling of progress towards further liberalisation of global trade, with September’s inconclusive break-up of talks in Cancun, Mexico. If this is combined with the new protectionist attitudes now being seen in America, the prospects start to look quite grim.

Those who argue for protectionism in American are trying to stop the economic clock. Part of the process of world economic development is the current “offshoring” of jobs to economies like China and India. Attempting to stop that progress is a bit like the approach Canute had when he thought he could stop the tide coming in. America should be concentrating on developing new industries, not propping up dying old ones. As long as US politicians believe the latter is the best policy, there will be a big cloud hanging over trade.

From Industry magazine, December 2003

Comments

Well said

Posted by: Gary Bezowsky at December 11, 2003 02:35 AM