Trade War 2009?

From the Telegraph:

The EU trade commissioner vowed to fight back after the bill passed in the House of Representatives late on Wednesday included a ban on most purchases of foreign steel and iron used in infrastructure projects.

The Senate’s version of the legislation, which will be debated early next week, goes even further, requiring that any projects related to the stimulus use only American-made equipment and goods.

The inclusion of protectionist measures has quickly raised hackles in Europe.

Catherine Ashton, the EU trade commissioner, said: “We are looking at the situation. The one thing we can be absolutely certain about, is if a bill is passed which prohibits the sale or purchase of European goods on American territory, that is something we will not stand idly by and ignore.”

Back in the USA, Bill Lane, who is the government affairs director for Caterpillar, is very concerned about the implications of protectionist legislation:

“We are the first to recognise that if the US embraces Buy American then the whole notion of buying national will mestastasize and limit our ability to take part in overseas projects. We are students of history. A major reason a very deep recession turned into the Great Depression was the fact that countries turned inward.”


“We would be a primary beneficiary of any type of infrastructure project in the US, but at the same time we are one of the country’s largest exporters”

Caterpillar is of course not the only company for which exports are extremely important. At firms ranging from Boeing (airliners) and GE (locomotives, power turbines, medical equipment) to small manufacturing enterprises, there are millions of jobs which are dependent on the willingness of other countries to buy American products. Too often, politicians portray international trade as something we do almost as a favor to other countries, ignoring the very real benefits that Americans derive from trade.

I believe that manufacturing is very important to this country, and would support rational policy initiatives to help make American manufacturing more competitive. Starting a trade war, though, is not the answer to the problems either of American manufacturing or of the American economy as a whole.

(via PowerLine)

20 thoughts on “Trade War 2009?”

  1. Just as Smoot-Hawley aided in sinking America into the Great Depression, so will this. Just as the governments efforts to increase wages during the Great Depression kept unemployment extremely high, so will the equal pay law Obama just signed and so will the gifts to the Union bosses which strengthen unions at the expense of all labour. Just as government’s disastrous agriculture policies and the NRA during the Great Depression reduced output at the worst possible time, so will the new, badly written and hastily passed regulations, tax hikes and recently proposed policies like buying and destroying dairy cows to increase the price of milk.

    Just as FDR built on Hoover’s disastrous intervention, Obama will build on Bush’s. Unfortunately, the deficit is already much larger than at the beginning of the Great Depression and we are well on our way to becoming a banana republic in the enraptured by a of a full-blown cult of personality.

  2. Well, we were warned. They said, during campaign, that graduates should become social workers. That “building community” is more laudable than being a professional or in manufacturing. They are consistent in their goal: to make this country dependent on welfare and demagoguery of social “justice”.

    I didn’t think the destruction will be that swift, but it looks like it will.

  3. Not to mention that restricting steel and other purchases to American only will increase the cost of these infrastructure projects meaning we will get less infrastructure for each dollar spent. If we really need these projects then it seems that we should build them in the most efficient manner possible.

    Can you imagine in this day and age trying to get all the paperwork to show that your materials and machines are all American made? Can you imagine even defining “American Made”?

    More and more I see Democrats as so divorced from the realities of the productive world that their ideas are little better than those of naive children.

  4. Shannon…”Can you imagine even defining “American Made”?”…probably *relatively* easy for steel, although even for that there are complexities (viz steel made in India from iron ore and coal both imported from the U.S.–does that count as “American made?” How about steel made in the U.S. from scrap imported from Korea in Danish ships?) But it gets *really* complicated when you talk about manufactured items with deep product structures of assemblies, subassemblies, and piece parts.

    Creates tremendous job opportunities for lawyers and lobbyists, though.

  5. I love the term, ‘productive world.’ It’s like that’s the fight that is on, you know? Between the productive, and those that think their ‘product’ (bizarre regulation and the like) is, er, productive.

  6. When Bush was president the Democratic Congressional leadership was willing to lose a war to gain partisan advantage. Now that Obama is president the Democratic Congressional leadership is willing to destroy the economy to gain partisan advantage, and Obama is either complicit or too weak to reign them in. We might come out of this OK if there is enough popular opposition to Congress’s spending orgy to impose political costs on Congressional leaders, or if Obama realizes that his success as President depends on not destroying the economy, and musters the backbone to oppose Congress. Otherwise the situation doesn’t look good.

  7. Free trade, or “free trade,” has worked out so well for America in the past decade, hasn’t it?

    The free-traders have lost all credibility for me with their endless acceptance of China’s mercantilism. Wasn’t Cheney one of the leading free-traders? He also said, that trade deficits “don’t matter.” A trade war with Europe is a distraction; a trade war with China an inevitability and a necessity. When two countries have incompatible interests and neither one can change course (the US consumer can’t keep buying, and China can’t stop producing) then conflict is what we’ll get. Only a trade war will shrink America’s unsustainable trade deficit.

  8. Jerry:
    Free trade, or “free trade,” has worked out so well for America in the past decade, hasn’t it?

    It has indeed worked out very well. A vast array of high-quality goods and services is now available to American consumers at lower prices than was formerly the case. This is why American consumers prefer these goods and services to domestic ones.

    The USA has a comparative advantage in high-tech, high-margin manufacturing (computers, aircraft, etc.) and services. It no longer has an advantage in many low-margin manufacturing sectors that are now dominated by China, Vietnam and other low-cost producers. The Age of Steam is over. The world changes. Manufacturers who don’t adapt to new competition go out of business whether the competition is foreign or domestic. The process that you attempt to demonize as “free trade” (in quotes) is merely life in a dynamic world economy. Nobody owes American or other manufacturers a living. Get used to it.

  9. “I believe that manufacturing is very important to this country, and would support rational policy initiatives to help make American manufacturing more competitive.”

    I think this too but I see no sign from the economic and political master-minds in DC that encouraging this basic sector is what they have in mind (at least I haven’t heard anything about such a plan). Value may be created in other ways but a more permanent, basic, value is found most in producing real goods. The cost of stimulating industrial growth would be trivial (and trivial is not a strong enough word, I suspect) to what is being done to destroy the free market system and grow government by bailing out financial firms that should simply go bankrupt.

    I do wonder if the “high margin, high tech” (that Jon alludes to above) is as good a base as the older industrial types of industry in difficult economic times. If so, this may be especially true now because much of the technological advantage we once had is gone.

  10. One major thing that could be done to help U..manufacturing is to fix the tax code to stop discriminating against asset-intensive businesses (depreciation vs expensing of asset acquisitions). (This would also be of value to the freight railroads)

    Another thing would be for Congress to use more intelligence in regulatory legislation and stop doing things like this, which is about to cripple and even destroy a considerable number of manufacturing enterprises.

    I also fear that our society suffers increasingly from a sort of aristocratic disdain for those who are actually involved in the physical production process…distain for the plant general manager and the manufacturing company CEO as much as for the line worker.

  11. The United States is the Dollar Store for China. How can American manufacturing -which is regulated to the point of being irrelevant- compete with no regulations, prison labor of China? Not everything is equal in free-trade and many of the arguements fair-traders make are justified. The free-traders have shoot themselves in the foot and their cause by only speaking in near economic-theological terms on how it benefits the American consumer and little else.

    By the end of the year Obama will start advocting and implementing protectopnist policies that will make the Smoot-Hawley Act look like child’s play. He will have to because the life savings of the US has been spent (squandered) on “stimulus.” The United States will resemble the elderly lady in town that has the big old Victorian mansion, the reputation of wealth, the jewels, the cars, and only one dollar in the bank. In other words, all reputation from a glorious past that has long been over. Most governmental officals and economists haven’t a sense of reality how far the US is in depession, and not recession.

    Danny L. McDaniel
    Lafayette, Indiana

  12. -Modernize the depreciation rules.

    -Cut capital-gains and corporate tax rates.

    -Repeal Sarbanes-Oxley.

    If we did these things US productivity and manufacturing output would bloom.

    The decline of our manufacturing sector wasn’t caused by China. It was caused by 1) productivity increases that make us more competitive in tech and less competitive in labor-intensive manufacturing areas, and 2) bad tax and regulatory policy decisions by us. Cause 1 isn’t bad and we can do something about Cause 2. The worst course of action for us would be to blame other countries and ignore our own mistakes.

  13. Danny…according to a 2007 study cited in the Financial Times, U.S. manufacturing output is 2X that of China.

    Note also that if China is not selling goods the the U.S. in large quantity, it will not have currency to invest in U.S. Treasury securities.

  14. The archetypal elderly lady is Faulkner’s Emily Grierson – and sleeping with the dead, denying death and thwarting our passions, never accepting that the past is the past produces only a death-in-life. We always come back to vision. Sometimes it seems like the depression is now viewed with nostalgia by those who previously were longing for another Vietnam. That some Americans would rather lay down with death, deny life & death, by ignoring risk, challenge, vitality – that prefer the past to the present – is a problem. Some ignore the threats abroad, cocoon themselves, knowing that mistakes are made when life is lived. Responsibility & commitment prove our merit but also our faults. Ideas, assumptions are important: the present economic crisis ignores that fact. The south finally shook off its Miss Emily’s. It became a more vibrant, happier place; something was lost, but much of what it lost was dead – or at least laying down with death.

  15. David Foster: “Note also that if China is not selling goods the the U.S. in large quantity, it will not have currency to invest in U.S. Treasury securities.”

    -This is apparently beginning to end for both sides. No selling to America, no buying US Treasuries. Both sides of this exchange are under severe attack.

    Jonathan: “It has indeed worked out very well.”

    -If you think that having access to cheap consumer goods is the most important asset for America, then yes, it has worked out very well… so far. There are many points in your argument that I’d take issue with, so I’ll pick just one. Here is something recent about the West’s edge in technology:

    In short, China thinks that it’s so big that it can make its own rules, regarding trade, tech transfer, etc. And the more successful it is in that, the more badly this will all end.

    “Get used to it.”

    -I don’t really have to get used to anything. I am an academic in Korea. Before that, three years in the furniture paint business in Vietnam. My money comes from the Asian export surplus side…

    To reiterate, China is far from a free-trading country. The ignorance of Asian culture, habits, and circumstances is profound in America, regretfully so among people who pride themselves on being “realists” in foreign affairs. (It has always amused me that the Heritage Foundation keeps awarding its “most free economy” ranking to Hong Kong.)

  16. Jerry wrote:
    If you think that having access to cheap consumer goods is the most important asset for America, then yes, it has worked out very well… so far.

    I didn’t say it’s the most important asset, I said it’s beneficial. Isn’t it?

    I also didn’t say that China is a “free-trading country”. I didn’t say anything about the Chinese economy. I argued for free trade. Free trade benefits us even if China doesn’t practice it. If we restrict trade by US businesses we deprive US consumers of choices. That doesn’t help us even if it punishes China (and I do not argue for punishing China).

    As for the article to which you link, are you arguing that we should limit our trade with China because China will steal our technology? If that’s your argument, why would you expect the Chinese govt or Chinese companies to stop stealing our technology if we limited our trade with them? Wouldn’t they continue to steal our technology? They have done it with secret military technology; I don’t see why they wouldn’t do it with commercial technology that they could obtain even if not directly from us.

  17. Back in 2004, Warren Buffett proposed an interesting approach to closing the trade gap via the issuance of import certificates….basically, companies that *export* receive the certificates, a market in the certificates is created, and companies desiring to import must use certificates…thereby automatically bringing exports & imports into balance.

    This is still a form of protectionism, and there are issues with it and questions about how it would actually work in practice, as I note at the link. (Someone at Seeking Alpha suggested that this plan may be under consideration by the Obama administration giving Buffett’s advistory role to the administration.) However, it would be preferable to highly-politicized micromanagement by Congress of every single individual export and import item.

    Which is probably why most Congresspeople won’t like it…not enough opportunities for favor-banking.

  18. Jonathan: “Free trade benefits us even if China doesn’t practice it.”

    -I thought it takes two to tango. I guess we have different definitions of free trade.

    -My link to the article on high-speed trains refers to your contention that the West has an advantage in high technology. I suggest that the West is losing this edge. The answer would be to insist on free trade, i.e., don’t copy our technology or we’ll slap duties on your plastic toys.

    -China and America have different mentalities. Strange that conservatives always railed about this in respect to the old USSR, but cannot see that the same is true here. China tends to think much more than America does that trade is a zero sum game. China is in it to win, not to “grow the pie” for the world. Have you ever been to China, Jonathan?

  19. Jerry,

    If I may presume to speak for Jonathan, it really doesn’t matter what China thinks it is doing. China maybe out to screw us over but we still get the benefit of trading with them. Every single instance of trade occurs because both parties believe they will be better off after the trade than before it. Even if, as if likely, China believes they are exploiting us, they can’t induce us to trade without giving us a deal that leaves us better off than we were before.

    Back in the 80′ people raised the same objections about Japan. Now we sell more stuff in Japan than ever before. We sell more stuff to Canada than we sell to Mexico even though Canada produces much more stuff for America than does Mexico.

    The basic problem here is the idea that in all trade each side has to get equivalent benefit or the trade is exploitive. In reality, a trade merely has to leave each side better off than it was before the trade occurred.

  20. The argument about Japan is true but also entirely unconvincing to me, because it omits the fact that America continues to have a big trade deficit with Japan–$60 billion last year.

    Now, I realize that the US trade deficit is largely due to our oil imports, and that up to some level trade deficits are not important, but to claim that we shouldn’t have worried about Japan because “we sell more stuff to them than ever before” omits the reality that we continue to have a deficit with Japan, and that if China’s case is analogous (and I didn’t bring up Japan in the first place), then we will always be in substantial deficit with respect to them. And China’s export machine can become at least an order of magnitude larger than Japan’s.

    In any case, the market is solving this problem. The US consumer is out of money, and China will not continue to advance credit. And I’d better stop there before I score any more goals against myself…

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