Free Trade vs. Protectionism - A History Lesson in Tariff's, War, Peace and Prosperity

"The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary" - H.L. Mencken

History indicates that Free (and Fair) Trade policies vs. Protectionist views may come down to a choice between World Peace and Global Conflict.

Furthermore, since imports are like "kryptonite" to inflation, free trade helps combat corruption and locally set high prices for low quality. Competition is just good for consumers.

All those pining to "Buy American", won't pay a higher price for a Made In America label in the long run. Its a terrific sound byte on a campaign trail, but at the end of the day, it just isn't practical, it has been proven ineffective and only appeals to the bigot voters not the consumers.   

No country has ever flourished under a protectionist government. Nationalism often is the pre-curser to isolationism, and we only need to look to North Korea to see the end result of that road.  

Most who have been following me know that I am a lifelong, international trader and strong advocate of free, fair and open trade, through sensible Free Trade Agreements.

As you read this, the world is changing, right before our eyes, and happily, mostly for the better.The continued development and support of free trade policies rather than protectionist views, will be the most effective way to approach the future and chip at wealth inequality and poverty, one day at a time.

At the end of 2008 I opined that export programs, Free Trade Agreements and fair market competition would be panacea for what ailed the US Manufacturing sector and subsequently its working class.

In fact, I thought we would and could export our way out of the great recession. Thankfully, we did!

From my iComTrader Blog Post - Posted Tuesday November 22, 2011 5:32:00 PM EDT  US manufacturers should stop whining, and start competing for export market share.

"Last year I wrote about the US being positioned to once again become a viable manufacturing economy, to be built on the backs of new export markets and opportunities being presented by globalization.

I also wrote, that free trade needs to be embraced and protectionism, needs to be avoided, at all costs. I was met with resistance and cries for the US to impose protectionist policies, and punish China, as many politicians were casting blame on China for all of the financial woes of America. It's become a silly campaign mantra of many. (Read my blog relative to China Bashing).

Many argued that China would never be in a position to buy from the USA, and that I must be crazy, stupid or both to believe so. Well, a year later, many seem to be joining me in the asylum. 

I have been around the international markets for my entire professional career of close to 30 years. I entered the markets as a China trader, when China was an importer with an insatiable appetite of commodities and raw materials, that came back as finished products.

Over the span of my career, I have had the pleasure of doing business in some 40 countries, and for the most part, it was the same story, albeit in different shapes and sizes, namely raw materials out, finished products in.

The advent and subsequent proliferation of the super stores ala Home Depot, Wal-Mart, etc.,, resulted in the end of the "mom and pop shop", and the explosion of the super stores using buying power, to fill the US market with cheaper imports. Not all bad news for the American consumer, as imports allowed for low inflation, competitive pricing, and access to products for many that otherwise, would have been out of reach.

I have heard all of the arguments about union wages, poor manufacturing structures, non competitive pricing, cultural differences and the like. Those arguments all seem to lead to a call for protectionist policies, which further complicates the ability for newer US exporter. I don't buy any of it. There are many large companies that are US based that dominate world markets with their brands, even in China. 

In my view, most that is wrong with our trade imbalance and currency deficits today, boil down to a tone of mediocrity, that has replaced the entrepreneurial and competitive nature and spirit of the USA. 

Now, since a man a lot wiser than I once coined the phrase about necessity being the mother of invention, we are entering a period in our manufacturing sector that exporting is a necessity to survive.

And low and behold, we have an opportunity right now as the US Dollar is losing ground and the Chinese are creating wealth for their citizens(some, not all) never seen before. The future can be bright for those, thinking globally. With all of this new liquidity in a zero inflation setting, you'll be looking at Dow 20,000 and the S&P hitting the high water mark at 2400 before the 2016 presidential election (assuming Obama wins a second term)"

Protectionism has shown to result in high inflation, loss of jobs, sinking economies, wars and even both world wars.

The crisis of 1929 unleashed inter-imperialist trade conflicts which then contributed to transforming the crisis into a long depression and a world war. The capitalist crisis unleashed in 2008 will be all the deeper in that it has been delayed by a level of indebtedness without precedent in capitalism. It could be all the more devastating if the first protectionist measures and the premises of trade conflicts are confirmed.

The capitalist leaders of 2009 were conscious that their world is on the brink of the abyss and that protectionism would be a step too far. They have not forgotten the lesson of the Great Depression. In June 1930, nine months after the Wall Street crash, two Republican members of Congress introduced the so-called Hawley-Smoot Tariff Act, which increased tariffs to a record level on more than 20,000 imported products.

More than a thousand economists then signed a petition denouncing this move. Several countries quickly responded by erecting their own trade barriers.

Trade between the US and Europe fell by three quarters in two years. According to US data, world trade fell by 66 % between 1929 and 1934. At the end of the Second World War, the governments included in the Bretton Woods agreement a reduction of tariffs on imports, the prelude to the signature of the GATT agreement some years later.

Here is some well written and thought out comments from Jim Porter an economist employed in the international financial institutions.piece entitled "The Sirens of Protectionism.

The discourse of the G-20

Pascal Lamy, director of the World Trade Organisation (WTO), knows very well that the impact of a protectionist spiral would be considerable, but prefers vague formulae: “There is certainly a risk, there is no doubt… We do not know too well what the impact will be. What is certain is that it will be bad rather than good”. He added that nonetheless: “protectionism is not a rational thing, it is a kind of psychic, psychological drive that seizes economic actors when they feel in danger [1].

The members of the G-20, meeting in Washington on November 14, 2008 to discuss the crisis, envisaged the adoption of measures to stimulate demand by expansionist budgetary and monetary policies, but also by renunciation of any kind of protectionism.

Similar exhortations have not been slow in coming. The 21 member countries of the Asia-Pacific Economic Cooperation Forum (APEC) undertook in a common declaration to maintain a "firm position” against any protectionist temptation in reaction to the world crisis.

Meanwhile the French and Brazilian presidents affirmed on December 23 the will of Europe and Brazil to “work together” to exit the crisis, and called for the conclusion of the Doha cycle trade negotiations in 2009. “We cannot put off the liberalisation of trade” after the defeat of these negotiations, said Brazilian president Lula. In these times of crisis, it is “essential to resist protectionism” added European Commission president Barroso. “Nothing would be worse than protectionism”, chimed in French president Sarkozy.

President Bush on January 12 warned against the protectionism ’It would be a huge mistake if we became a protectionist nation”. And added: “In tough economic times, the temptation is to say, well, let’s just throw up barriers and protect our own and not compete”. The outgoing Secretary for Commerce in the Bush Administration also warned against protectionist tendencies, in the US, China and elsewhere.

Limitation

Curiously, a provision, perhaps the most significant of the G-20, has been little remarked on: the limitation to 12 months of the undertaking to not take protectionist measures. Why limit this cardinal principal of capitalist globalisation to 12 months? Undoubtedly for two reasons.

Firstly it is about rebuilding confidence by letting it be understood that the crisis would be no longer than the most recent ones and will be over at the end of 2009. With the tempest over, incentives to protectionism will become limited and manageable by the WTO’s mechanisms of conflict settlement. Everything indicates, despite the expected denial of the leaders and the economists in their service, that the crisis will on the contrary be the most serious since that of 1929.

The second reason is that the leaders of the G-20 know that the crisis is lasting and that many countries will fall prey to the protectionist siren songs. So this is only about putting off their implementation.

The information gathered and presented below show that the implementation of protectionist measures is still limited but that their preparation is very active and promises to deepen the crisis. The day after their signature of the G-20 statement, most of the countries began to sharpen their protectionist weaponry.

Nationalist and protectionist policies offer a dual advantage to the bourgeoisie of each country: 1) transferring a part of the crisis to competitor countries, and 2) diverting abroad the discontent of the workers as it prepares to exploit them still more severely.

Protectionism in the “defensive” sense, namely restrictions on international trade, is increasingly offset by what some call today “neo-protectionism”, or “offensive” protectionism, in other words a whole set of public measures supporting entire economic sectors in the face of international competition, so as to defend their shares on the national market. These measures are generally contrary to the agreements signed under the guidance of the WTO, notably the antidumping agreement and the agreement on subsidies and compensatory measures.

The first failure of the G-20 was registered precisely on the question of international trade. Noting the absence of sufficient consensus among the biggest economic powers, WTO director general of the WTO, Pascal Lamy, renounced convening the ministerial meeting specified by the G-20 summit before the end of 2008 to settle the negotiations of the Doha cycle. Not only have these negotiations been stalled since 2001, but the WTO registered an increase of 40 % in anti-dumping complaints in 2008.

Salvaging the banks

In a great number of countries, governments have adopted plans to salvage the banks stretching from guaranteeing deposits or interbank loans, to the buying out of toxic assets, via recapitalisation and even partial or complete nationalisation. The massive injections of funds and public guarantees give the banks of the rich countries a huge competitive advantage over their equivalents in the dominated countries. In these conditions, the dominated countries feel themselves justified in rejecting all liberalization of the trade in services, beginning with the provisions of the General Agreement in Trade in Services (GATS).

In the countries where these plans are sufficient, they strengthen the national financial sector and favor concentration, including the control of foreign banks. This “neo-protectionist" dimension has not escaped the European Commission. It has not failed to note that these plans to rescue banks were contrary to article 101 of the Lisbon Treaty, which forbids the constitution of dominant positions. Community law has nonetheless not stopped the movements of banking restructuring and concentration: the buyout of Fortis by BNP-Paribas, HBOS by Lloyd-TSB, LBBW by the regional bank of Bavaria, of Dresdner by Commerzbank, or Bradford & Bingley whose good bits have been shared out between Abbey and Santander. These rescue plans, without approval from the Commission are moreover deemed contrary to article 107 of the Treaty which forbids state aid.

In France, in consideration for loans of 10.5 billion Euros to the banks, the government requested that the latter increase their credits to companies and individuals. This point poses problems for the Commission which sees in it a competitive advantage benefitting the banks. In granting more loans these banks could thus rely on state aid to win clients. The Commission has recommended a remuneration of at least 10% of the public funds put at their disposal, which is deemed to be too high by Paris.

First condemnation of China by the WTO

In December 2008, the Appellate Body of the WTO confirmed its condemnation of the Chinese regulation which obliges Chinese car manufacturers to pay a supplementary tax of 15 %, in addition to the 10 % of customs duties collected normally on imported spare parts, if they do not use a sufficient quantity of parts manufactured in China. In 2007, exports of car spare parts from the European Union (EU) to China exceeded 3 billion Euros. The total trade in goods between the EU and China exceeded 300 billion Euros in 2007.

This was the first complaint raised by the EU, supported by the US and Canada, against China and it was the first time that a dispute with China reached the level of the reports of the Special Group of the Appellate Body. China how has a time period to negotiate to bring its measures into compliance with WTO legislation, after which the EU could adopt trade sanctions if China does not end its violation of that legislation.

In Russia, the Prime Minister, Vladimir Putin, has also launched a car rescue plan: “When our production sites have no other choice than to reduce their production, I think that it is totally inadmissible to spend money in buying imported cars”. The Putin plan consists of subsidising loans for the purchase of Russian vehicles, guaranteeing the bond issues of Russian constructors at a level of 70 billion roubles (1.8 billion Euros), subsidies to encourage public bodies to renew their car fleets, and, a classic protectionist measure, increased customs duties for imported vehicles, including second hand ones. As an immediate consequence imports of Japanese vehicles have fallen, and there have been street protests organised in Vladivostok by port workers and Toyota importers and distributors.

Recovery plans

In the United States, the United Kingdom and in China, the recovery plans amount to hundreds of billions of dollars. The priority for these plans is not the revival of household consumption but large scale infrastructural projects. One of the reasons for this, openly proclaimed, is to strengthen the attractiveness of the territory for capital. The governments justify their privileging of the promotion of supply rather than demand by arguing that the national economic tissue will be thus in a position to profit from the recovery in the spending of neighbors.

Accumulation before the satisfaction of needs is at the heart of the logic of capital. It is the dynamic which leads to chronic crises of overproduction, but capital knows no other logic. 

Exchange rate wars

Recovery plans on this scale imply budget deficits which could put in question the solvency of some states. So the latter also have recourse to another significant anti-crisis weapon, monetary policy. Letting the currency depreciate favours exports and discourages imports. The measure is all the more durable since in the deflationary climate of the countries in crisis inflation does not risk eliminating the passing advantages of a devaluation. The war of exchange rates, as in previous crises, can strongly contribute to the burial of the declarations of cooperation of the G-20.

In spring 2008, the US Federal Reserve (FED), in spite of the inflationary threat (with oil barrels close to 150 dollars), reduced its interest rates, and brought the dollar down against the euro, to a record 1.60 dollars per euro. Strengthened by this exchange rate competitiveness, US exports grew at an annual rate of 3.4 % in the second quarter of 2008. The fall in rates accelerated on December 16, 2008, when the FED brought its key interest rates down to between 0% and 0.25%.

Faced with the collapse of the dollar and the pound (approaching parity with the euro), the equivalent of competitive devaluations, the other countries were not inactive. The Central Bank of Japan showed a new monetary suppleness, bringing its rates to 0.1 %, down from 0.3 %, to prevent the yen from continuing to appreciate. Even the European Central Bank finally abandoned its habitual orthodox tone.

Timothy Geithner, Obama’s Treasury Secretary, declared in January to the Senate Finance Committee: “President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency” to boost its exports. China defended itself immediately: “Criticising China without basis on the question of exchange rates can only serve US protectionism and will not contribute to finding a real solution to this question” said the Chinese trade minister.

Attempting to confront the domination of the dollar, China has decided on an experimental basis to pay with its currency, the yuan, for goods exchanged between two regions (the Yangtze delta and that of the Pearl River) and Hong Kong and Macau. The measure is described by the official daily “China Daily” as “the first step towards the transformation of the yuan into an international currency”. Two provinces in the south/south-west, the Guangxi and the Yunnan, should also acquire the right to use the yuan to trade with the members of the Association of Southeast Asian Nations (ASEAN).

The socialist alternative to capitalist disaster

The volume of world trade fell by 2% in 2008 for the first time in half a century. Until then, trade grew twice as quickly as world GDP. It seems likely that this fall will be more marked in 2009, following the deepening of the crisis and the adoption of protectionist measures. Less than two months after the undertaking not to introduce any protectionist measures, it is clear that the breadth of the current crisis of capitalism could end in a new protectionism.

It is doubtful that this new protectionism will end up in a fractioning of the markets as significant as in the 1930s, because the internationalisation of capital is much more advanced and customs barriers, after a half century of trade liberalisation, are lower than then. The average customs tariff has fallen from 40% to 5% since 1947, according to the IMF.

Nonetheless, protectionist campaigns have every chance of unfolding in many countries, with a major objective: diverting workers from the sole positive way out of the crisis, socialism, by preaching national unity and nationalism, indeed xenophobia. The protectionist impulse can only deepen the economic crisis, without presenting the slightest alternative to capitalism. The crisis could lead to restrictions on migration, including even inside the European Union. Germany, Austria, Denmark and Belgium still reject lifting restrictions on access to the countries that joined the EU in 2004. “In a period of economic crisis, it is normal to try first to make our unemployed work before opening our labour market too broadly to foreign workers”, said the Belgian minister of employment, Jo?lle Milquet, on January 23.

Contrary to what certain bourgeois or reformist politicians maintain, protectionism is in no way a response to the capitalist crisis. It is only the response of national capital to inter-imperialist competition, which in the extreme circumstances of a crisis of capitalism could transform rivalries between capitals into political conflicts and even wars, as has been the case in the past.

Sectors of the reformist left, some of which have advocated free trade, will discover in the crisis the virtues of a certain degree of protectionism. They only follow the capitalists who have an interest in alternating liberalisation and protection according to the relations of force and the conjuncture.

The workers do not have to fight for market shares, and still less against other workers. The only solution to exploitation and to crises is the expropriation of capital. To advocate protectionist measures, without challenging the market economy, means, involuntarily or not, preparing the ground for trade wars, xenophobia and wars which could emerge from a capitalism with its back to the wall.

The future of humanity lies in the struggle to get rid of capital, not in support for its international expansion (neoliberalism), nor in its consolidation at the national level (protectionism). The distribution of goods and services, just like their production, should escape the dynamic of the accumulation of capital and respond to the needs of humanity, decided democratically. Only a socialist revolution on a planetary scale would allow the implementation of cooperation and solidarity in all areas, including in the area of goods and services.

We must counterpose planning of the world economy based on agreements of cooperation, that is the right of peoples and not capital to decide on the mode of insertion of nations in the world economy. These cooperation agreements will be based on the satisfaction of needs, far from the current logic of accumulation of capital at the expense of the living conditions of workers and the survival of the planet.

James Vena

About the Author - James Vena is an innovative thinker and global entrepreneur who has influenced key decision-makers around the globe in strategic development, growth, leadership and investment. He is respected for his unique and global perspectives, big ideas, team building, partnerships and methodical execution of a strategic plan.

Since retiring as the Founder/CEO of a well-established global trade house, James has earned a strong reputation as an adviser to a wide array of business entities around the globe. James’ s career started as a China trader of commodities in the early 1980's for a large trading house. He left his job to start his own trading company at 26.

Over the next 20 years he developed the company (SATCORP) into an internationally recognized entity with offices in 15 countries, achieving sales over USD 1 Billion before it was sold. After taking a sabbatical in 2005 to care for his cancer stricken wife and help raise his two children, James decided to re-enter the business world in 2010.

Since, he started a few ventures, been retained as an adviser to several businesses around the globe, headed a globalization, restructuring and rebranding effort, advised on several mergers and acquisitions and continue to do so as an independent consultant and advisory board member.

James’s entrepreneurial mindset combined with a gift of articulation and unique style of communication enables him to turn ideas into easy to understand and marketable undertakings. Mr. Vena is an ethical culturist that practices benevolent capitalism and teaches socially conscience entrepreneurship. He attributes his successes to his mentors and practicing of intellectual humility. He also now mentors these core principals to groups, individual and aspiring entrepreneurs worldwide.

Check out James Vena’s other posts and feel free to connect.