Trade skirmishes are one thing, full-blown trade wars quite another. Politicians, even the most fervent believers in the virtues of free trade, sometimes have to bend to constituents’ demands for protection. Ronald Reagan urged Japanese auto manufacturers to accept “voluntary quotas” on their exports to the U.S., and George W. Bush found merit in domestic manufacturers’ demand for steel tariffs. No lasting harm done to what remained basically a globalized free trading system, made freer at periodic intervals by multilateral deals cut under the aegis of the World Trade Organization (WTO). When those proved difficult, then-U.S. Trade Representative Bob Zoellick, now head of the World Bank, led the way in negotiating bilateral trade-opening agreements and pushing them through a sometimes reluctant Congress.
A worldwide recession changes things. President Obama professes fidelity to the teachings of Adam Smith, perhaps without realizing it, but is driven by domestic pressures to tilt towards protectionism. Banks availing themselves of bail-out funds were told not to hire foreign workers, even though some of the most talented financial analysts working in these international institutions are not American citizens. States receiving stimulus money are enjoined to “Buy American,” a congressional insistence that the president, to his credit, tried to get around by introducing language to provide suppliers and contractors with a large, but in the event ineffective, loophole. And when wearing his hat as CEO of General Motors, Obama forced the car maker to shift production of small vehicles from China to states that were important contributors to his election victory.
America, of course, is not the only country finding protectionism an attractive way of soothing the ruffled feathers of the trade unions and taxpayers who do not want to see their bail-out and stimulus money leaking abroad. The WTO reports 100 trade-restricting measures undertaken by 30 countries and the EU in the past six months. And the World Economic Forum reports that America ranks a high 16th on its “enabling trade index” among the 121 nations studied, a notch above France (17th), four above the UK (20th), and well above Russia (109th) and China (49th).
It is the disparity between America’s more-or-less free trade policies, and China’s increasingly restrictive policies that contains the seeds of real problems for a global economy struggling to emerge from recession. If any recovery is to prove durable, America and China must rebalance their trading relationship. So long as China runs a huge surplus with America, America will send dollars to China, China will recycle those dollars by buying U.S. Treasury bills, thereby keeping interest rates low in America, discouraging savings and encouraging unsustainable levels of debt and consumption.
Neither party is happy with this deal. The Chinese complain that the Obama administration’s madcap spending and borrowing spree will generate an inflation that will shrivel the value of the trillion or so dollar assets stored in their vaults. Our politicians are unhappy because the Chinese manipulate their currency to keep it “substantially undervalued”, in the words of a new International Monetary Fund report, in order to stimulate exports, which the regime feels it must do. Late last week sighs of relief could be heard in Chinese ministries at reports that the country’s growth rate climbed to 7.9% in the second quarter, only insignificantly short of the 8% target set to keep unemployment below socially destabilizing levels. The Chinese regime considers currency manipulation a minor offense, if an offense at all, compared with the greater evil of riots that might depose a regime that has no democratic legitimacy and must therefore literally deliver the goods if it is to stay in power.
That means that the prospects of a G-2 sit-down at which these problems are resolved is becoming less likely. The Chinese are furious that the US International Trade Commission has imposed duties as high as 55% on low-cost Chinese tire imports that the ITC says are disrupting the US market. Obama has to approve the decision, and risks antagonizing the 15,000 tire workers whose union initiated the proceedings if he does not. So far, the President has not been a profile in courage when dealing with the unions that played so important a part in his electoral victory.
The Chinese are even angrier that the Obama administration’s fiscal policy, and the Federal Reserve Board’s policy of increasing the money supply — a policy, it should be noted, that the Fed might, but only might, be reversing — have the potential of reducing the value of their dollar hoard. So angry, in fact, that they continue to call for a reduction of the role of the dollar in world markets, their latest argument being that wild fluctuations in the value of the dollar make trade more difficult and expensive.
In pursuit of its war against the dollar’s dominance, China is stepping up its financial support for the IMF as a possible predicate to substituting some sort of IMF-backed currency for dollars, and striking trade deals with countries such as Brazil, accepting the real in payment, no dollars involved. But it is important to look at what the Chinese do, not only at what they say: in the second quarter China continued to increase its holdings of U.S. Treasury bonds, and quietly passed the word that it recognizes that the dollar will remain the world’s reserve currency for a long time.
Meanwhile, China continues to distort world markets by setting export quotas on raw materials such as magnesium, zinc, and coking coal, keeping prices to its own manufacturers low, and raising prices and costs for U.S. and EU companies. After two years of futile negotiations, the U.S. and EU have filed a joint complaint with the WTO. China claims its export restrictions are solely aimed at preserving the environment.
There’s more. China recently increased tax rebates to exporters, stepped up its generous loans from state-owned banks to finance exports, increased subsidies to enable manufacturers to travel abroad to trade shows, and incorporated a “Buy-Chinese” provision in its stimulus package. So much for hopes that faster growth in China will be the engine that pulls the world out of recession.
Most important of all, the Chinese have come up with a policy they hope will allow them to dominate the emerging markets in green technologies. These, reason the Chinese, are infant industries, worthy of protection that will enable them to realize economies of scale and hone technological skills needed to dominate world markets. If, in addition, they have to rely on export subsidies, technology pilfered from the U.S. (say critics here), and control of rare metals such as neodymium, needed in the manufacture of wind turbines and electric cars, so be it. This is about dominating a technology, not preparing for free and open trade in wind machines and solar panels.
The important results of all of this are two: a rebalancing of world trade becomes an even more distant goal, and China’s accelerated protectionism is grist for the mill of our own protectionists. When consumer spending in America recovers, but job creation lags because much of the new spending is on t-shirts, appliances, cars and computers made in China, don’t expect American politicians to try to explain to angry voters why such an international division of labor is really in their interests. Or persuade them that the recent decline in our trade deficit means trading has suddenly become fair. A protectionist rant is more likely to preserve the jobs politicians deem most important — their own. The better educated politicians might recall that Adam Smith wrote, “There may be good policy in retaliations when there is a probability that they will procure a repeal of the high duties or prohibitions complained of.”
Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).
