This past weekend I travelled to Sweden. It was jolly lovely; lots of rain, blondes, Volvos, vodka, and Euro-techno. However, during the long bus ride from Skavsta Airport in Nyköping to the city of Stockholm, I was inundated with numerous large neon signs, all reading “SCANIA.” These signs were attached to even larger buildings; at least two dozen of them flashed by as we pounded down the desolate highway. After I exited the bus, I turned around only to discover that it had a SCANIA logo plastered over the front of it as well. Apparently, SCANIA is one of the largest truck and bus manufacturers in the world with tremendous market share in Europe, Asia, Africa, and South America. One will not find them in the United States, however; this is because of a tariff imposed by our government on “lorries” not manufactured within the United States. This tactic, instated to support our domestic truck manufacturers, is an example of protectionism.
If you delve into your elementary school memories, you may recall the mercantilist trade policies Britain exercised with the American colonies. The Navigation Act required that all colonial trade be conducted on British ships operated by British soldiers; furthermore, some goods had to be shipped to and noted in Britain before they could be transported to their final destination in the colonies. Despite their recent memory regarding the burden imposed by these practices, the new United States of America advocated protectionist policies after independence. One of the main proponents, Alexander Hamilton, used the domestic industries’ infantile state as justification that newly founded industries and organizations should be allowed to reach a state of self-sufficiency and sustained growth so that they could successfully compete on the international market.
However, this does not explain current protectionist practices enacted around the world. Two years ago, the European Court of Justice declared illegal the long-standing German “Volkswagen Law,” which specified that any shareholder in Volkswagen could not exercise more than 20 percent voting rights, even if their stake in the firm was bigger. The United States has even more substantial systems; the most recent to come to light is our law preventing foreigners from owning more than 25 percent of the big American airlines. British Airways, American Airlines, and Iberia attempted to integrate their transatlantic operations, enabling them to coordinate fares, frequent-flyer programs, and flight schedules apparently in the best interests of the consumer. The true reason for this potential joint venture was to get around our protectionist laws and enable them to more effectively compete. The European Union is pressing for this restriction to be lifted, though the chance is small.
Protectionism has backfired on the United States before. From 2001 to 2003, the Bush administration imposed “safeguard tariffs” on various steel products from certain countries. Then-president George Bush’s justification constituted “unfair foreign competition,” such as inexpensive products and government subsidies. During the 20-month period during which the policy was in place, foreign steel makers found other markets and rebuilt their demand. In 2004, when the tariff was lifted due to potential retaliation by European and Asian countries, American demand rose, steel prices increased nearly 50 percent.
While President Obama has been extremely vocal in his disagreement with protectionism above current levels, he misled the pub lic as evidenced by his inclusion of a “Buy American” clause in the $900 billion economy recovery package passed earlier this year. The provision specified that only homegrown iron, steel, and manufactured goods are used in the projects funded by the bill. It was later repealed, and quite rightly; precluding companies from buying the cheapest goods available to them slows economic growth, hindering job creation. Perhaps most significantly, engaging in protectionism runs the risk of international retaliation; if we refuse to buy foreign-made goods, then our established trading partners will refuse to buy our stuff. We are the world’s largest exporter; who will be hurt more?
There are other arguments against protectionism as well. Because I often slept in economics I didn’t learn about “comparative advantage.” Comparative advantage stipulates that while free trade creates losses,they are outweighed by gains resulting from each country’s ability to specialize in the production of goods and services in which they excel. Everyone works together, everyone gains together.
While most agree on the economic disadvantages and general “inequality” of protectionism, doubts exist regarding the use of protectionism as a statement. In September President Obama enacted significant tariffs on all car and light truck tires entering the United States from China. While many contend, probably correctly, that the move was to gain support for his health care bill, I believe that the move was a statement (in a sharp deviation from Bush policy) to not take China’s alleged trade violations lightly. Chinese efforts to boost exports through currency manipulation can no longer be ignored. Couldn’t one consider currency manipulation a form of protectionism?
Market Report: Protectionism Stymies U.S. Economy
Published: Thursday, November 19, 2009
Updated: Thursday, November 19, 2009
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