This Thursday, for a second time, the G-20 leaders in London will embrace free trade and commit themselves to avoiding protectionist measures, just as they did four months ago in Washington.
Their efforts will likely fail.
Not that they haven’t failed already, mind you. According to a report by the World Bank, several countries implemented trade-restricting measures after the G-20 November meeting, including 17 countries that were in the meeting. And although the scope and depth of these measures is small relative to the size of the world market, they bode poorly for the near future.
However, it is not that the G-20 leaders are hypocritical. I think that most of them agree that trade is, in general, actually good for their countries and benefits the majority of the population.
So what’s going on? Well… politics.
In properly working democracies the president or the prime minister cannot just do what he or she wants. The legislative branch often interferes in the presidential decision making process –as we see happening plenty nowadays in the US Congress. Some would argue for the better, others for the worse, but then that’s the classic democratic separation of powers in action.
Additionally, these also are not normal times, which only make things more difficult. The economic crisis has exacerbated economic nationalism. As people lose jobs they become angry and look for someone to blame. First on the list usually are all things foreign, followed by large corporations. Take a look at the Mexican trucks dispute in the US, where a pilot program allowing trucks to enter the US has ended in part to protect the jobs of Teamster truck drivers.
Some congressmen are keen to capitalize on these feelings and pander to those constituents making the most noise. While doing so, they make consensus a difficult task, affecting governability and presidential maneuverability. Sadly, we’ll see things get worse before they get better, as the economic crisis persists –and it will.
This is dangerous, of course. Protectionism favors specific industries and specific people, usually backed by powerful lobbies and strong unions. Free trade, on the contrary, benefits most industries and the majority of people, rich and poor alike, but it lacks the big and organized defenders. Now, don’t expect this argument to stick in Congress, even if your president is the one saying it.
In the midst of the financial crisis and job insecurity, economic nationalism has resurfaced in its most unproductive and dangerous form, having implications not just for U.S. producers but for Latin American markets as well.
In the approved Senate version of the $800 billion U.S. stimulus package, the Senate inserted a provision requiring that all manufactured goods used in projects financed by the plan be produced in the U.S. In a later version, the Senate watered the provision down to say that the requirement should not violate existing international trade commitments. But while the “Buy American” provision--even in its vague, watered-down form--may not be protectionism in the strict sense, it will have the same effect: increasing costs of projects, wasting taxpayer dollars, sparking retaliation from our trading partners in the hemisphere, and undermining U.S. jobs.
According to a study by the Institute for International Economics (IIE), the provision would only generate 9,000 jobs, a fraction of those needed. If you build in the expected cost overruns due to closing off competition, it will likely translate to even fewer, as fewer projects get funded.
The real cost, though, will come overseas, as our trade allies retaliate against U.S. companies. Already the proposal has sparked vocal complaints from editorial boards, economists such as Paul Krugman, and even the U.S.’s number one trade partner and neighbor, Canada.
Let’s take the case of Latin America. For decades now U.S. companies have argued against anti-foreign restrictions on bidding for state contracts. Companies as diverse as heavy machinery manufacturers to software companies have contested limitations on their right to compete with local companies on public contracts.
Their complaint? That by establishing artificial barriers to competition, Latin American governments were creating inefficiencies in the allocation and management of public contracts (not to mention the potential for corruption) and failing to serve the interests of taxpayers by not ensuring that public projects go to the cheapest and most efficient supplier. The U.S. government in its bilateral negotiations with governments and in multilateral forums supported this argument.
But the problem with the U.S. Congress’ “Buy American” provision is more than hypocrisy. It also threatens retaliation. If existing governments in the region follow suit with their own “Buy Brazilian” or “Buy Ecuadorian” rules, it will freeze out heavy machinery companies, infrastructure and software enterprises from hard-won markets. The result will hurt the American producers and their workers, according to the IIE by as much as 64,000 lost jobs.
Sadly, this throwback to economic nationalism misses a fundamental fact about the integration of the Americas. Today, steel, cement, automobile, and machinery companies exist in a borderless world. Mexican cement companies own U.S. plants. Automobiles “manufactured” in the U.S. have crossed borders numerous times during their assembly. Today in terms of ownership, production and inputs, we are too intertwined to define what is “U.S.”and what is “other.”
Doing so is harmful to U.S. interests, out of step with history, and ultimately hurts the very person it’s supposed to help: the U.S. worker. We should oppose the "Buy American" provision in the stimulus package and insist that it be removed now as the bill goes to conference between the House and the Senate.
As Barack Obama begins to define his presidency, one pending question is what shape the new administration’s trade policy will take. For that, we’re sure to get more answers at the confirmation hearings for U.S. Trade Representative-designate Ron Kirk. But, one thing is certain. Over the past several years, trade has become something of a four-letter word for many, and Americans tend to place some of the blame for our current economic woes on trade agreements.
Despite what the Lou Dobbs’ of the world say, free trade is not the enemy. Trade critics often argue that job loss in the United States is the direct result of our trade agreements. But new data show the trade deficit decreased from $208 billion in October 2008 to $183 billion in November 2008—a $25 billion drop in just a month—even as the unemployment rate rose above 7 percent. In fact, Department of Commerce numbers show that the United States has a $10.3 billion trade surplus with its 14 free-trade agreement (FTA) partners. This should argue in favor of more trade agreements, not against.
With the scope of the recession looming larger with the release of each new gloomy statistic, talk of the New Deal-style package (and it’s potential scope) grows with it. But today in the digital age there’s a significant new component to stimulating the economy (including state investment in infrastructure that recalls the historic images of WPA). Today in the information economy it also means investment in digital infrastructure.
Although the U.S. invented the Internet and much of the soft and hardware that made it possible and led to its exponential growth it is now 15th in the world in access to high-speed Internet connections. In a recent speech President-elect Obama talked about his goal of getting every child connected to the Internet and promised to use a portion of the stimulus money to connect libraries and schools.
The election campaign has ended, but Commerce Secretary Gutierrez is still on the campaign trail for the Colombia free-trade agreement (FTA). This week, he was on the hustings at the Small Business Administration trade symposium. The message: we must pass the Colombia free-trade agreement “with the same sense of urgency that we passed a stimulus package several months ago.” He’s right.
And these small businesses owners certainly understand that our economy would benefit. Approximately 10,000 U.S. companies export to Colombia, and of that about 8,500 are small and medium-sized firms—the engine for economic growth in the United States. With this FTA in place, the U.S. trade relationship with Colombia would shift from one of unilateral preferences granted to Colombia through the Andean Trade Promotion and Drug Eradication Act to a relationship where U.S. industry enjoys the same benefits already granted to Colombia. The Colombian market would open on a reciprocal basis to U.S. goods, allowing 80 percent of U.S. products to immediately enter Colombia duty-free. Without an FTA, the high tariffs levied on U.S. products means that a Caterpillar truck, for example, faces more than $200,000 in taxes when sold in Colombia. Clearly, this is not good for either country.
In these unsettling economic times, it is mystifying how Congress could shy away from passing an agreement that—combined with the already-in-place Peru FTA—would increase U.S. farm exports by $1.39 billion and provide over 18,000 new jobs.
June 1: This AQ-Efecto Naím segment looks at sustainable cities in the hemisphere.