Protectionism and the free-market Economist
The Economist magazine is furious with Barack Obama for his announcement of a 35% import tax on tyres from China. The writer looks at the role of world trade in the extraordinary burst of growth that globalisation has triggered, which has “lifted hundreds of millions out of poverty over the past few decades and brought lower prices to consumers everywhere.” The effect is being threatened now though, as world trade is predicted to fall by 10% in 2009 and many countries attempt to help their domestic industries with subsidies or new tariffs on imports: the Economist quotes a report from the Geneva-based World Trade Alliance claiming that, on average, once every three days a G20 member has broken the no-protectionism pledge they made at the summit in April. Specifically, they look at the potential problems to be caused by the new import tax on Chinese tyres: either consumers will have to pay more for tyres made more expensively in the domestic economy, which will cause the motor trade to suffer, or buyers will simply switch to an alternative source of low cost imports, from India or Malaysia, in which case the US jobs will be lost anyway, and in either case there is the risk of provoking retailatory measures from China.
Does one small measure of protectionism matter? The selective steel tariffs introduced by George Bush on imports from China in 2002 had very little effect on trading relations between the two nations in the long-run. The Economist thinks that this is different, and that America has to take a leading role in resisting the temptation to protect, but also largely because they are reliant on the Chinese as major buyers of the government bonds that are financing America’s massive fiscal deficit.
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Obama treads a difficult path with Chinese tyre tariffs
One aspect of the global trade recession in 2008-09 has been the resurgence of protectionist tendencies as countries have lined up to introduce fresh barriers to trade in goods and services. The pressures for import protectionism in the form of tariffs, quotas and other barriers is largely driven by politics and there is a new example to dissect with the news that the US government is to raise the import tariff on low-grade Chinese tyres following a petition filed by the United Steelworkers trade union, which represents workers at many US tyre factories. Chinese exporters will be subject to 35% import tariffs (taking effect on September 26th) which will decline to 30% in the second year and 25% in the third.
Recession prompts a return to protectionism
Here is an important article by Phil Thornton from Clarity Economics which flags up attempts by a group of trade economists to monitor the growing scale of explicit and hidden forms of protectionism in global trade. International trade in goods and services is forecast to contract by nearly ten per cent in 2009 and across the world, countries are either considering or have already introduced a raft of distortionary import controls. Protectionism is spreading from the purely economic (i.e. changes in import duties, subsidies and quotas) to the financial (linking financial bail outs to national economic objectives) and also affecting the labour market (e.g. changes to immigration policies / points systems) - the rise of ‘new protectionism’ threatens to cause further de-globalisation and increase the risks of beggar-thy-neighbour retaliation that could stall a trade-based recovery.
“Global Trade Alert (GTA), which was launched in June, had identified 67 discriminatory measures by July 8, of which 47 had been implemented with 20 waiting in the wings. Discriminatory measures include rises in tariffs that importers must pay or bans on products. Examples include a ban by Saudi Arabia on imports of cars older than five years and a 39 per cent increase in tariffs on Russian oil exports to Belarus.”
EU single market creaks under the pressure of the recession
Wolfgang Munchau has an important comment article on the fragility of the EU single market in todays Financial Times.
read more...»Blatant protectionism
Evidence mounts of a return to protectionism - much of which is being practiced by the countries who will gather in London for the G20 conference this week.
read more...»
Protectionism is the crack of economics
This is a somewhat arresting quotation from Dallas Federal Reserve president Richard Fisher - who is a former deputy US trade representative. He explains that, if the US recovery package does result in protectionism in US industry, it will give an immediate high that leads to economic death. He is referring to the US government’s $800bn (£567bn) bailout package which includes a policy called “Buy America” meaning that all of the projects financed by the bailout should favour American iron and steel, over imported materials. It could, perhaps, even allow American preference for all “manufactured goods”.
read more...»Risk of protectionism in recession policies
Concerns about protectionism ending free trade agreements, as countries take measures to get their own economies out of recession and back to growth are now taking centre stage – today the EU has expressed concern about Barack Obama’s recovery package because it includes a ‘Buy American’ clause, which seeks to ensure that only US iron, steel and manufactured goods are used in projects funded by the bill. The US Congress is surely likely to feel that the $800bn it is being asked to spend should all be for the benefit of the US economy. The EU Ambassador has expressed concern that, if passed, the measure could erode the US’s global leadership on free trade. Canada’s International Trade Minister Stockwell Day went further: “These protectionist measures, in a time of recession, only make things worse,” he told broadcaster CBC. ”It can only trigger retaliatory action and we don’t want to go there.”
Should the US Senate see this as a threat?
Globalisation and EU labour law
The unofficial strike action centred on the Lindsey oil refinery in Lincolnshire is illegal, as any strikes called without a ballot and proper notification are counter to employment law. It seems to be based on a complicated example of sub-contracting involving French, US and Italian companies – an example of globalisation involving ‘a process of deeper international economic integration that involves a rapid expansion of international trade in goods and services between countries’.
read more...»Worst case scenario for the UK
Paul Mason, Newnight’s Economics correspondent is on fine form at the moment with a cluster of really good pieces for Newsnight. Here are two recent pieces available from the BBC web site.
In ‘worst case scenario’ Paul Mason looks at some of the systemic risks facing the UK http://news.bbc.co.uk/1/hi/programmes/newsnight/7851138.stm
and in this piece he considers the rising tide of protectionist sentiment - are we now moving into an age of de-globalisation?
For a more optimistic view here is another piece from Paul Mason on the best case scenario for the UK
The Temptation of Competitive Devaluations
For our A2 macroeconomics teaching, we are moving into a study of exchange rate economics and the impact that currency movements have on key variables such as real output, profits, jobs, trade balances and living standards.
The decisions that countries make about exchange rate regimes can have a lasting effect on their macroeconomic performance. One topic in the news at the moment is the issue of whether individual countries - facing severe and painful downturns - will opt to use the exchange rate more aggressively as a tool of economic management. Today’s Independent has an interesting paragraph:
“Sterling has lost 8.1 per cent versus the dollar and 5 per cent against the euro this week alone, and is one-third down on its international value of a year ago. The G7 is said to be ready to discuss the pound’s precipitous decline, amid fears that the world could fall into a series of competitive devaluations”
Competitive devaluations occur when a country deliberately intervenes in foreign exchange markets to drive down the external value of the currency to provide a competitive boost to their international trade industries. For nations with persistent trade deficits and rising unemployment this can become an attractive option - but there are risks. I recommend that A2 economists read ”What’s really wrong with Sterling? - The pound is suffering its worst ever fall in value. Why is it happening and what are the implications? Edmund Conway, Telegraph Economics Editor, has the answers.
Jeremy Warner’s comment piece in the Independent on exchange rates and the risks of protectionism is also worth a look.
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