Beggar Thy Neighbor

posted by
on February 25, 2009

Reams of newsprint, and considerable air-time on television news programs, have been devoted recently to the controversial Buy American stipulations that require the use of only American-made steel in federal infrastructure spending — highways, ports, airports, railways, and so forth — that Congress inserted in President Obama’s $787 billion economic stimulus package. But as often happens when hot political issues meet the usual flurries of press attention in 24-hour news cycles, the basic economic point as to whether Buy American makes sense, or doesn’t, has tended to be obscured. But it’s really pretty simple.

Richard Fisher got right to the nub of the matter in just two lines. “Protectionism is the crack cocaine of economics,” observed the witty president of the Federal Reserve Bank of Dallas in a recent speech. “It provides a temporary high but is instantly addictive and leads to certain economic death.”

For sure, that prospect of certain economic death extends even to the advocates of Buy American laws themselves. This is perhaps the strangest thing about the whole controversy: the most ardent Buy American proponents would quickly see their own businesses ruined, if those laws were applied to their own business practices.

President Obama, to his credit, has tried to limit the damage that has been done to America’s international economic prestige by saying that these are no times for Beggar Thy Neighbor policies. But Obama is the man who shares much of the blame for creating the confusion in the public’s mind in the first place, en route to the Oval Office as the candidate of economic nationalism. At one point during last year’s presidential campaign, Obama took the position that the government should be required to buy only American-made motorcycles, referring to that American icon, Harley-Davidson. Obama made fun of Republican rival John McCain for not going along with that idea. Nobody — especially McCain, an instinctive free trader who apparently didn’t know enough about basic global economic realities to respond effectively in terms that ordinary voters could easily understand — pointed out that if Obama’s economic prescription for Harley were to be taken, the dose of protectionism would kill the corporate patient.

Last week, on his first foreign trip as president, Obama had to back peddle the Buy American cause when he flew across the Canadian border to visit Ottawa, marking Obama’s first trip on foreign soil in his presidency. And he was subjected to a little lecture by his Canadian host, who (smartly) used terms that American presidents are not used to hearing from their trading partners.

It’s not hard to see why the Buy American subject has become an embarrassment in respected international economic circles. Let’s begin with a quick look at the estimable members of the American Iron and Steel Institute, whose lobbying with the congressional steel caucus drove the Buy American provisions in the stimulus bill. Try to imagine a world where the domestic steel manufacturers would themselves have to Buy American.

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Hillary Clinton does Asia

posted by
on February 19, 2009

Hillary Clinton has been in Jakarta yesterday and earlier today, completing the second leg of her inaugural “listening” tour of four key Asian capitals this week. Clinton’s Asia week began in Tokyo on Feb. 16. The U.S. secretary of state has just flown to Seoul (it’s already Thursday evening in Asia), and will wrap up her week on Sunday, after two days in Beijing.

In each city, naturally, there is great interest in what Clinton’s visit will likely foreshadow for the direction of President Obama’s evolving diplomatic agenda. For observers who track trade issues, particular attention focuses on Clinton’s own perceived emerging role as a player in forming international economic policies. While the administration is still just getting started, the initial perceptions in Washington are that as secretary of state, Clinton could well be far more deeply involved in trade than any of her recent predecessors. There are several reasons for this.

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Hillary Clinton’s arrival in Indonesia today is a significant event for the Southeast Asian nation. Barack Obama has pledged to restore America’s image abroad, and Indonesians have greeted that pledge with particular optimism — after all, Mr. Obama lived for four years as a child in Jakarta. A strong relationship is in everyone’s interest, especially since Indonesia is the world’s largest majority-Muslim democracy. Yet Mrs. Clinton will find that one major issue is clouding this spirit of hopefulness on both sides: protectionism.

There’s more than enough blame to go around here. After China, Indonesia is probably the country most likely to make U.S. trade officials livid. Indonesia has long been afflicted with economic nationalism, and protectionist sentiment has been on the rise in the wake of the global financial crisis. A new mining law gives preferential treatment to state-owned enterprises. A lengthy “negative list” closes, or strictly limits, foreign investment in important sectors of the Indonesian economy: hospitals, courier services, telecommunications, and many more. Indonesia’s health ministry recently decreed that pharmaceutical companies must either manufacture their drugs for the Indonesian market in Indonesia, or partner with a local (politically connected) licensee — a step that would disrupt global supply chains.

As for the Indonesians, when they look across the Pacific they also sometimes see the ugly face of protectionism. Indonesians can point to the Buy American provisions in Mr. Obama’s economic stimulus bill that require the use of U.S.-made steel in highway construction as a worrying sign. President Obama has pledged to resist efforts to enforce Buy American regulations that would violate America’s World Trade Organization commitments, but experienced legal observers are looking for the fine print.

And more fundamentally, when many Indonesians look at how they are treated by the Americans on trade, they, like many other U.S. trading partners, see evidence of a double standard. Specifically, Indonesians point to high, discriminatory U.S. tariffs on important Indonesian exports like tuna, clothing and shoes; complain about harassment by customs officials at U.S. ports of entry; and worry about moves in Congress to bar import of clove cigarettes, a major Indonesian export, that would seem clearly to violate WTO rules. In short, restoring America’s image in Indonesia is going to require more than a visit from Mrs. Clinton, although she’s making an important start.

By far the most unfair U.S. trade practices are the high tariffs on clothing and shoes, which can range from “only” 8% to an extraordinary 30% — or even twice that in some cases. Last year, Indonesia’s exports of clothing and shoes to the U.S. were valued at $4.6 billion, and were subject to tariffs of $790 million. By contrast, high-tech products that wealthy European countries export to the U.S., like airplanes and telecommunications equipment, face minimal American duties. The total value in 2008 of all products exported across the Atlantic by Britain and France was $101 billion — and that resulted U.S. tariffs of $790 million too. Clearly the Indonesians are getting a raw tariff deal. As Edward Gresser of the Progressive Policy Institute, a pro-trade, centrist-Democratic think tank in Washington, points out, the high shoe- and clothing tariffs are not only “regressive, but they impact poor women in countries like Indonesia, and poorer American shoppers, the hardest.”

And there’s much more. Consider that the U.S. subjects Indonesia’s canned tuna to a 12% tariff — but canned tuna that is processed in Australia is duty free, thanks to the U.S.-Australia preferential trade deal. That Australian tuna often spawns in Indonesian waters.

In other cases, Indonesian exporters are falling victim to congressional arbitrariness. Congress is considering a move that would bar the sale of Indonesia’s famous clove cigarettes in the U.S. as part of a broader ban on flavored cigarettes. This is billed as a health measure, especially since clove cigarettes have become a teenage fad in America. But thanks to lobbying from domestic industry, American-made menthol cigarettes would be exempt from the flavored-smoke ban. This kind of special exemption for domestic producers most likely runs afoul of America’s WTO commitments. Indonesia’s ambassador to Washington, Sudjadnan Parnohadiningrat, notes that hundreds of thousands of Indonesian farmers and workers are employed in the clove-cigarette industry. No wonder he says “We do not want our products discriminated against.”

All of this certainly colors Indonesian perceptions of America. And the difficulty of trading with America certainly has an impact on Indonesia’s economic development, which will become only more pronounced as the worldwide economic slowdown drags on. The U.S. has a critical interest in a prosperous, free Indonesia. As she travels through Asia this week, Mrs. Clinton would do well to pay careful attention to what her counterparts tell her about the effects of U.S. trade policy on their economies, and about how that trade policy alters their views of American economic leadership.