Wednesday, February 11, 2009

NY Times debates protectionism

The NY Times has a debate room on the merits of the Buy American provision, which was watered down somewhat.

Most of the responses were predictable. I was disappointed that Robert Scott, senior economist at the liberal Economic Policy Institute, defended protectionism, saying that

Some of the loudest protests about buy-American provisions have come from self-interested American companies like Caterpillar and General Electric that manufacture overseas. Foreign ministers from China and Russia, which haven’t signed the procurement codes, have also complained, but these countries simply want something for nothing. Giving them access to stimulus spending will dilute the impact of the recovery bill and eliminate all incentives for them to sign the codes.

When domestic industries have been injured by unfair trade practices, protecting them is good policy. For example, China spent more than $15 billion on energy subsidies for its steel industry in 2007 alone. These subsidies were illegal under World Trade Organization rules, and the United States has an obligation to protect domestic steel producers in such cases.

The US has injured other industries through its own trade practices. I agree that the US doesn't want too much of its stimulus money going to overseas suppliers - as would China and Europe - but remember, they buy American crap, too. That mindset is not far removed from the nativism I decry elsewhere on this blog.

I was more intrigued by the response of Ha-Jun Chang, an economist at Cambridge.

Is protectionism good or bad? The short answer is that it depends.

There are two kinds of protectionism. One is the protectionism that developing countries need to protect and nurture new producers. It is known as infant-industry protection and is based on the same reasoning that people use when they send their children to school, rather than making them child laborers. It can fail but it was successfully used by virtually all of today’s rich countries when they were developing countries themselves — starting from 18th century Britain, through 19th century United States and Sweden, to 20th century Japan and Korea.

The other is a kind of protectionism that all countries, both mature and developing, sometimes need when they must make sudden large adjustments. Unlike finance, where things can be rearranged quickly, the real economy takes time to adjust. Therefore, when you have a big shock like today’s economic crisis, it makes sense to create the breathing space for the producers to restructure. This is why, even as they are repeating their commitments to free trade, the rich countries are providing their industries a huge amount of direct and indirect protection.

Some people worry that this will lead to a 1930s-style all-out trade war. But in the short run, there is actually no danger of that. Now we have the World Trade Organization, the European Union and many other regional trade agreements that limit protectionism. Of course, in the longer run, if veiled protectionism continues, we run the risk of making a mockery of these agreements and destroying the global trading system.

However, the solution to this problem should not be an adherence to the principle of free trade, which is not workable in practice anyway, but instead to establish a new international agreement that allows a transparent, forward-looking and time-bound protectionism as well as more infant-industry protection for developing countries. In other words, by allowing more protectionism now in a controlled way, we will be able to preserve the international trading system better in the longer run.

That's a far better and fairer analysis. It removes things from a nationalist lens. It places them in the context of allowing developing nations to develop, and nations in need of adjustment to adjust. The US is not using that lens - only the lens of protectionism.

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