economic protectionism south of the border

re: concerns that a proposed bill in the US is protectionsist

I recently read about a proposd bill in the US that would dictate that any money spent on stimulus measures should be supplied by American producers.

Apparently there are concerns that this is amounts to a protectionist measure. For those who don't know their economic history, this harkens to the days of the Smoot-Hawkley tariff act in 1930, a piece of legislation that is sure to get more airtime in coming months. Many economists see this as the trigger that turned the asset crisis following the 1929 bust into the Great Depression.

My main point? Don't worry about! There's no reason to think that this is specifically protectionist at this point in time. (However, if we can paint it as somewhat so, then those who demand protectionist measures can possibly be appeased by these measures and we can avoid the potential worst that could come from escalating tariffs).

One may wonder how this could be seen as not protectionist. Then again, one might also wonder how it could be seen as protectionist. The second one first ... This could be seen as protectionist becasue it favours American industry at the expense of foreign producers, which effectively goes against the principles of free trade.

Let me offer an analogy before I make my argument that, considering the times, this can justly be considered as falling within the scope of free trade.

Imagine that some parents wants to support their child's university education. Should they send the cheque to the child, or to a fund at the university that will distribute money among the student body? Obviously, their cheque will have the desired effect of supporting their child's education if they send the check directly to the child.

I don't know if the connection is obvious here, since the US (the parent, which is not meant to imply paternalism) is much bigger, and there are many people. But, if we consider the American economy as the student, and other economies as the other students, then I could ask the question again. What's the best way to get the money to the kid?

It's not as though anyone is proposing that the US make things directly more difficult for the competition in the school of life, in the world economy, by charging higher taxes against foreign goods.

Just think - if the US wants to stimulate their economy to prevent a collapse, then why on earth should anyone expect materials for public projects to come from anywhere but the US?


Also, and this is the resounding punch - at the aggregate level, this is simply a handout the the American private sector: the government will buy up all the most expensive construction materials, while all the cheapest imports will go to the private sector. This probably does frontload the stimulus to American producers, but at the back end of the plan we see hidden incentives that may help some construction firms get back on their feet because the best deals will be left for them.



Whether the WTO, the international orgnization that is charged with maintaining and promoting trade agreements, would agree with me is a different questino altogether. Either way, I think that threatening, or even pursuing WTO actions should be seriously considered by those who are concerned about the consequences of even wider preferential measures for America's industries. Not, mind you, with the goal of winning, but with the goal giving American policy makers and politicians the ability to tell their populace that they have even gone into the face of international opposition to protect American industries, but in the interests of improving national security by maintaining good relations in these trying times, that anything more is simply not on the table.


The risks? That foreign politicians, in need of scapegoats for problems at home, will be all too effective at convincing their electorate they have fought hard for national interests, and trade relations will degenerate as we all get used to zero sum, or less, games as we all get too focused on national interest. Also, there's the risk that the WTO suit would piss off enough Americans that political pressures would rise for more protectionism.

But, I don't think that these risks, combined, outwiegh the risk of the protectionist crowd in the US, once getting the bit in their mouth, deciding to run off with a repeat of the 1930 tariff act. That, my friends, would be a surefire way to erase a generation of economic growth and increase the risk of global conflict.

Bring the suit on, fight bravely, tell the public we're fighting hard for the national interest, and then before the nationalist fervour festers into mob mentality, every political ledaer can declare that they have fought hard on our behalf in the international trade arena, and most importantly, American protectionist sentiments can be satiated with some costly American steel and lumber for new infrastrucutre, and the world can breathe a sigh of relief that this is as far as protectionism will go.

The rest of us consumers and businesses will still have the right to choose our goods based on price, ethics, sustainability, or whatever, without paying a greater premium for the geographic origin of the product.