Protectionism Also Rises in Asia

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Pascal Lamy, the director-general of the World Trade Organization, has been sounding the alarm bells as he warns that political leaders around the world should refrain from responding to the global finance crisis by enacting protectionist measures that will only cause trade flows to shrink even further. On Jan. 26, Mr. Lamy circulated to the WTO’s 153 member countries a confidential 114-page report that documented unsettling ongoing efforts by various countries to close their borders to imports. While the Europeans (with new farm subsidies for cheese and dairy products) and Americans (with various “Buy American” provisions in the $787 billion economic-stimulus package) were the focus of much of the criticism, the report also singled out such Asian protectionist offenders as India, Indonesia and South Korea. On Jan. 28 in Davos, Switzerland, Mr. Lamy buttonholed Asian leaders, including Chinese Premier Wen Jiabao, on the sidelines of the World Economic Forum. Late last month, the WTO leader flew to Asia, where he issued even more public warnings. And later this month, Mr. Lamy is planning to send another “restricted” report to WTO members, which is expected to provide further documentations of the spreading global economic nationalism.

Every important leader Mr. Lamy has spoken with has—oh-so-sincerely—agreed that the dangers of protectionism are very real. “Experience shows that in crisis it is all the more important to stick to a policy of opening up and co-operation,” Premier Wen declared in Davos on Jan. 29, one day after he huddled with Mr. Lamy. That same day at the World Economic Forum meetings, India’s trade minister, Kamal Nath, warned against “the sounds of protectionism.” It is important to “recognize that at the heart of globalization lies global competitiveness, and if governments are going to protect their noncompetitive production facilities it’s not going to be fair trade,” Mr. Nath observed. Across the region, all the top political leaders have been singing from the same free-trade song sheet. But do they mean it?

Mr. Lamy’s Jan. 26 confidential report noted that “India raised tariffs on some steel products and issued notifications restricting imports of some steel products in November 2008.” And in South Korea the WTO report observed that tariffs will triple on crude-oil imports, to 3% from 1%. Meanwhile Indonesia has issued orders specifying that “only five ports and certain international airports are to serve as entry points for certain imports, such as electronics, garments, toys, footwear, and food and beverages,” Mr. Lamy’s confidential report observed.

Asian officials, like their counterparts in Europe and the United States, all seem to think that protectionism is an evil economic practice that the other guys give in to. When India recently slapped on import curbs to keep Chinese-made toys out of the hands of Indian children, Trade Minister Nath earnestly explained that the “public interest” was at stake, and expressed pain at the suggestion that India would resort to “protectionism.” As for India’s raising tariffs on steel—competition from China is the main target—Mr. Nath claimed that China deserved the increased duties because the Middle Kingdom isn’t a real market economy. Meanwhile, while the Chinese have vigorously protested India’s protectionism, they have also been busy with new subsidies and trade barriers to protect Chinese exporters, including domestic steel producers. The Indonesians are also making moves to protect their domestic steel companies, complaining that Indonesian consumers prefer foreign steel because it is made from more advanced technology and is cheaper. Such assertions might be laughable in respected economic circles, but the top trade officials are skilled in uttering them with straight faces.

Top honors for his remarkable ability to advance a ridiculous argument should go to South Korean Agriculture Minister Chang Tae-pyong, who met with Mr. Lamy in Seoul last month. South Korea would like to be helpful in the Doha Round’s tariff- and subsidy-cutting agenda, Mr. Chang averred. But the Korean trade official added that he hoped everyone would also agree that because his country’s small rice farmers were not competitive in global markets, Korea ought to be given special exemptions on slashing tariffs on the grounds that it is an agricultural “developing nation.”

One has to marvel at the logic, if not the audacity. South Korea, with an annual per capita GDP of about $27,000 (compared to $1,500 for Bangladesh) is asking the WTO to pretend that Korea is basically a basket case. Mr. Lamy’s retort to this is not a matter of public record, but presumably the WTO head is aware that Korea is a member of the Organization for Economic Co-Operation and Development, along with other rich countries like France, Germany and the United States.

But then Japan is also asking that its uncompetitive rice farmers be treated as poor-country peasants in the Doha negotiations. In Tokyo, the definition of a free trader is anyone who would dare to be brave enough to suggest that the proper level for Japanese tariffs on imported rice should be “only” 400% and not twice that.

Another thing that Japan and Korea, along with many others, agree upon is that the “Buy American” provisions that are in U.S. President Barack Obama’s stimulus package are outrageous protectionism. Again, the hypocrisy-meter should be hitting the high decibels at this point. If Washington’s autarkic practices are deplorable, what about their Japanese and Korean copycats? Both Asian nations have also carved out special exemptions in the WTO to restrict foreigners from their governments’ major construction projects—big-ticket items including water, electricity, airports and urban transport. There is also a threshold of $22 million below which the Japanese and Koreans have the right to bar foreigners from contracts altogether. Meanwhile, other countries such as China that are now busy issuing press releases blasting the Buy American laws haven’t even been willing to sign on to the WTO’s government-procurement agreement at all—ensuring that in their own construction projects, it’s quite often a “Buy Chinese” business where foreigners are not welcome.

If there is any country where officials should recognize the vital importance of their assuming leadership by their own sound economic example, that would be the U.S., which is still the strongest economy in the world. But in Washington, the current wave of economic nationalism threatens to become a tsunami. From a free-trade perspective, the atmosphere in Rep. Nancy Pelosi’s House of Representatives is positively poisonous. Consider one “economic idea” that the venerable Rep. Charles Rangel, who chairs the powerful Ways and Means Committee with jurisdiction over trade and taxes, has come up with. Mr. Rangel is pushing a bill called the Trade Enforcement Act of 2009. “America’s trading partners don’t always live up to the commitments they make in trade agreements with the United States—and the Bush administration too often failed to insist that they do,” Mr. Rangel explained when he introduced the legislation. The measure would create an Office of Congressional Trade Enforcer, which would “investigate barriers to U.S. exports, develop complaints against foreign countries,” and pressure the Office of the U.S. Trade Representative (an arm of the White House) “to file cases” against the foreign cheaters—singling out China as a high priority for the suspicious U.S. congressional sleuths.

And while on the subject of American-style protectionism that makes no economic sense, consider the political position that the new occupant of the White House has put himself in. During last year’s presidential campaign, Barack Obama took out a radio advertisement in Milwaukee, Wisconsin, home of the iconic Harley-Davidson motorcycles, in which the Democratic candidate ridiculed Republican rival John McCain for refusing to say that there ought to be Buy American laws for motorcycles. Sounds good, especially to economically illiterate American voters. But how far would President Obama get if he hopped on one of those famous Fat Boys that didn’t have its Japanese-sourced carburetor in it? Or the tires, brakes, wheels, or the electronics that Harley-Davidson buys at the best prices and highest qualities it can find, whether domestic or foreign? Not to mention that Harley-Davidson makes significant profits from selling its Hogs around the world. Harley executives declined to be interviewed for their feelings on what would happen to their company if, say, the Chinese and Japanese refused to buy American motorcycles, in a tit-for-tat response to a Buy American favor for Harley. But they surely understand that Mr. Obama’s helpful economic advice would be ruinous.

When such absurdities are (painfully) pointed out to them, most trade officials, whether they are in Washington, New Delhi or Jakarta, say that their current protectionist moves are politically necessary and designed to do only “temporary” limited economic harm to global trade flows. The bad old days of 1930s-style rampant global protectionism, they contend, will never come back. But even if that turns out to be true, what’s going on now is very dangerous. In his January report to WTO members, Mr. Lamy cited a recent study that pointed to what would happen if all countries increased their applied tariffs to their highest legally permitted rates. If that happened, the report observed, “the average global rate of duty would double and the value of global trade would be cut by about 8%” That ought to frighten everyone.

Small Ball

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Since the collapse last July of the World Trade Organization’s Doha Round, the object of which is to enable the expansion of international trade flows by persuading the WTO’s 153 member countries to slash tariffs and trade-distorting subsidies, WTO Director-General Pascal Lamy has refused to accept defeat. Lamy pressed as hard as he could to put a deal together by the end of 2008, so it would be in President Barack Obama’s in-box, come January 20, 2009, ready for him to put on the final touches. (Of course, the diminished support in the U.S. for trade wasn’t the only major worry for the WTO negotiators, but it was a major concern, given the importance of obtaining American support.) The idea was that despite the many protectionist IOUs that he had accumulated on the campaign trail, once in the White House, President Obama would not abdicate America’s international economic leadership by walking away from a deal that was all-but-done.) But the talks failed again in December, and the Doha process went back into intensive care. And now, President Obama seems content to put multilateral trade liberalization on indefinite hold.

But Pascal Lamy, a well-known marathon runner, doesn’t give up easily. He has been issuing a steady stream of warnings in recent months of the dangers associated with rising protectionism measures that are being taken by some WTO member countries. This is especially dangerous, Lamy has explained — repeatedly — as the current global wave of economic nationalism comes as the international economy is in a deep global recession, and trade flows are shrinking. In late January, Lamy issued a confidential 14-page report to the WTO’s 153 member countries, in which he singled out some recent protectionist developments in the European Union, India, South Korea, Indonesia and the United States as reason for particular concerns. Later this month, Lamy is expected to follow up with a second, even more detailed, report. Lamy’s basic argument is based on clear economic reasoning: if political leaders could now find the will to bring the Doha Round to a successful conclusion, that would constitute an economic stimulus package that would help expand international trade flows and help jump-start the global economy. In short, Pascal Lamy has been thinking strategically.

The chief executive officers of America’s major corporations are also supposed to be strategic thinkers, always looking over the horizon for looming economic troubles. So what has the premier corporate lobby in Washington, D.C. done by way of advocating what America’s top international trade priorities should be? The Business Roundtable — whose members include such sophisticated global operators as Caterpillar Inc., General Electric, FedEx, IBM, Cummins Engines, Deere, Procter & Gamble, and dozens more — has dropped its previous support for the Doha Round as a top priority. Nearing the end of last year, just when Lamy’s attempts to rescue Doha were at their vital make-it-or-fail point, the BRT’s corporate leaders decided to drop from the BRT website all mention of the Doha Round as any sort of a priority. BRT President John Castellani has declined repeated entreaties to comment on the Doha negotiations.

You could call it: small ball.

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Beggar Thy Neighbor

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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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