Beating the protectionist war drum
By Ryan Walsh (07/11/05)
You may have thought that a major goal of the U.S. was to integrate itself fully into the global free market, to stand at the vanguard of the globalization movement, and to shine as a beacon of economic freedom to the undeveloped world.
You thought wrong.
In many ways, we are moving backwards. Sizable segments of Congress have fallen prey to the temptations of economic isolationism. Even the ranks of Bill Clinton’s moderate, free-trading “New Democrats” have reverted to their half-brained arguments against international free markets.
CAFTA. Consider the Central American Free Trade Agreement (CAFTA), an accord that would establish an almost completely free trade zone between the U.S., Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic. This agreement would provide a huge new market for American agriculture. According to the University of Michigan, CAFTA would increase U.S. income by $17 billion. But Democrats ostensibly refuse to support CAFTA because it fails to impose compulsory labor standards on the signatory nations. Yet all six CAFTA countries have already tailored their labor standards to satisfy the expectations of the International Labor Organization.
Twenty-seven Democrats supported Clinton’s NAFTA in 1993. Only ten support CAFTA, a far more modest agreement by all accounts. If free trade is truly to be a new, 21st century platform for a new, 21st century Democratic Party, why did so many break with the party vision?
The Yuan. When CAFTA’s not around, protectionist Democrats (and some Republicans) kick around China instead. Don’t get me wrong. I’m all for kicking around China. The PRC’s record on human rights and democracy alone secure its position as the unrivaled evil empire of Asia. Yet when it comes to trade, a more prudential approach is ideal.
So what’s got protectionists on the Hill up in arms about China? At the center of the controversy is the Chinese policy of linking its currency, the yuan, to the value of the dollar. Just as the gold standard stabilized the value of the dollar before 1973, so has the U.S. dollar stabilized the value of the yuan. Because the U.S., as economist Art Laffer remarked, has effectively “outsourced Alan Greenspan to China,” China now maintains a low-inflation, high-investment economy, which purrs at an unprecedented growth rate of 10 percent.
But some senators call the yuan-dollar link “currency manipulation,” allowing the Chinese to compete on equal footing with U.S. producers. Senators Lindsey Graham (R., S.C.) and Chuck Schumer (D., NY) have threatened China with a 27.5 percent tariff on all incoming goods if it refuses to “float” its currency, or let its value rise in terms of the dollar.
Yet as economist Larry Kudlow points out, “Destabilizing the yuan would be just as disastrous as the so-called Asian contagion of 1997-98 when Robert Rubin and the IMF forced the smaller Asian Tiger economies to de-link from the greenback. That only led to recession in the Pac Rim and intense deflation around the world.”
WTO. The U.S. used to serve as the figurehead of international free trade. Now we find ourselves in violation of WTO directives. Congress was given until July 1 to dismantle its subsidy programs for cotton growers. It has failed to do so. According to the rules, National Review reported, a nation such as Brazil can now request official WTO authorization to levy its own $2.6 billion retaliatory tariff.
What is most frightening about the sudden rise in protectionism today is that it mirrors the economic thinking of the pre-Great Depression Congress. Tariffs such as Smoot-Hawley epitomized and enshrined the arguments of the isolationists, but they also invited foreign retaliation. This triggered a trade war, the Great Depression, and eventually World War II.
Congress would be smart to avoid taking this course a second time.
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