Thursday, April 19, 2007

Protectionism: all talk, no action

Job-saving protectionist proposals are mostly hot air -- and that's a good thing, economists say.

By Mark Gongloff, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Amid the jobless economic recovery in the United States, President Bush and politicians from both major parties are trumpeting protectionist measures they promise will save jobs.

But analysts say these measures are precisely the wrong medicine for the world's largest economy -- and say chances are they won't be passed anyway.

Though the latest recession was declared over in November 2001 by the gurus at the National Bureau for Economic Research, the job market never got the message -- one million jobs have been lost since then. Many of them have gone overseas, as manufacturers and some service providers have taken advantage of low labor costs in places like China, India and the Phillippines.

"Of the 2.7 million jobs lost since employment's peak, roughly a third have been lost to overseas competition, and most if not all of those jobs are not coming back," Mark Zandi, chief economist at, told CNNfn Friday. "And that trend is going to continue."

Meanwhile, a weak Chinese currency is often blamed for the continuing deterioration of the U.S. manufacturing sector, by keeping Chinese-made goods cheap relative to U.S.-made goods. And the situation is only getting worse; the Commerce Department said last week that the goods deficit with China grew to a monthly record of $11.7 billion in August.

The low price of manufactured goods from overseas also has pushed inflation lower, raising fears of a potential "deflationary" spiral, in which prices fall, corporate profits sink and the economy suffers.

Election year prompts posturing

As a result, President Bush, up for re-election in 2004, has put pressure on China to float its currency, the yuan, which the Chinese government keeps virtually on par with the dollar.

Democratic presidential candidates have called for tougher labor standards in China and other U.S. trading partners. And several protectionist bills -- such as the Currency Harmonization Initiative through Neutralizing Action (CHINA) Act of 2003, which would slap tariffs on Chinese imports if China doesn't float its currency -- have been introduced in Congress.

"We simply cannot allow countries like China, to continue their illegal, anti-free market trade practices," Rep. Mark Green (R-Wis.), one of the CHINA Act's sponsors, said at a recent Congressional hearing. "Their practices are costing us jobs."

All of this sort of talk makes economists, who favor free trade, very nervous.

"Protectionist sentiment in a slow-growth economy in the leadup to an election tops our worry list," David Rosenberg, chief North American economist at Merrill Lynch said recently, citing Green's comment and some of the bills floating through Congress.

Economists generally believe that unfettered trade improves living standards around the world, in part by keeping prices low and allowing for the free exchange of ideas and capital.

In a more practical sense, protectionism could impact economic activity in the near term, some economists say. Their fear is that pending bills such as the American Manufacturing Jobs Retention Act of 2003, which would force U.S. employers to keep half their work force in the United States, could undercut corporate profits and lead to even more U.S. layoffs.

"The U.S. body politic is now taking dead aim at China, making it the poster child for the latest outbreak of scapegoatism," Morgan Stanley chief economist Stephen Roach, who has testified before Congress about these issues, said in a recent research note. "The risk is that the blame game won't stop there. America's multinational corporations could well be next in line..."

All talk, no action

Fortunately -- or unfortunately, depending on your perspective -- few of these protectionist measures seem likely to pass, according to many political analysts.

"Are there any real protectionist proposals that have chance of enactment? No," said Greg Valliere, political economist at Charles Schwab Washington Research. "The most negative thing I would say is that the prospects for further trade liberalization are not great, but what we've got in place will stay in place."

For one thing, some of the protectionist measures on the table would violate America's international trade agreements and invite massive retaliation from trading partners, said former Treasury Department official Jeffrey Schott, now a senior fellow at the Institute for International Economics and the author of several books on trade.

"Many of the bills that have been introduced are designed only to send a strong signal, both to our trading partners and to [the president]," Schott said. "Most are not designed to be implemented into law."

What's more, the Bush administration's recent experiment in protectionism, a steel tariff imposed in March 2002, has had only mixed results at best. It may have helped steel producers in Pennsylvania and West Virginia -- states with critical electoral votes for Bush's re-election effort -- but U.S. steel users say they have suffered from it, resulting in thousands of additional job cuts.

"The government should have learned its lesson from steel tariffs -- they were a big disaster," said Matthew Ellis, an economist at Wachovia Securities. "I don't think these protectionist measures will be passed."

Ellis and other economists believe the only right medicine for the U.S. economy and the millions of U.S. workers displaced by the movement of jobs overseas is patience. Though things look bleak now, they say, the U.S. economy has undergone such massive changes before, shifting from agriculture to manufacturing early in the 20th century and from manufacturing to information in the late 20th century.

As painful as those changes were in the short term, they eventually raised standards of living. The key, many economists believe, is to make sure the American work force is well-educated and able to take advantage of the next big shift in the economy.

"To stop globalization would be the exact wrong thing to do; we have to embrace what's happening," said Zandi of "It's in place and will remain in place. We need to help [unemployed workers], make them better trained and skilled so they can get better jobs." Top of page