Tuesday, February 03, 2009

Buy America madness

The original Buy America act was passed in 1933 and together with the infamous Smoot-Hawley tariff bill caused the rest of the world to enact retaliatory penalties against American goods and companies. The result was that the recession turned into a depression, with Americans suffering worse than countries like the UK, which was able to keep free trade open in the empire.

And, unbelievably, here we are again. The European Union has sent an official warning, that they will take the Americans to the WTO if the clause remains in the bill and Obama signs it into law. The last time the EU took the Americans to the WTO over steel tariffs, the EU won, and proposed retaliatory tariffs so well chosen that Bush caved within a day. It's likely that the EU's retaliatory tariffs will hit the Americans where it hurts - defence contracts that American companies like to bid for, but which are paid for by the European taxpayer. I imagine lots of furious lobbying will now take place by those companies who are fearful of losing out.

Closer to home we have the idiotic wild-cat strikes over IREM refusing to sack it's permanent workforce (that it moves around) in order to hire itinerants. IREM appears to have won the contract in the first place because it delivers projects on time, which probably has something to do with having a permanent workforce (who are being paid Unite rates). They would lose their competitive advantage if they shifted to itinerants. Unite have got this wrong - they should be arguing for British contractors to adopt the same permanent team model that IREM have, which would enable them to do a better job as well as relieving the uncertainty that many itinerant workers suffer under.

Instead the fools at Unite seem to be arguing for discrimination against Italians. Note that there are more Brits living and working in Italy than Italians here (same goes for Spain, Portugal and Germany, with France the numbers net out). And some of them work in construction. I wonder how they are feeling. I sometimes wonder whether these unions have been infiltrated by BNP people. If they have, we should expel them. At least Peter Mandelson has made it clear that we have no plans to alter the existing treaties on freedom of movement. I'm glad he's back in government.


Update 4th Feb 2009: It looks like Obama is already moving in response to the EU complaint. The Times reports that:

Last night Mr Obama gave a strong signal that he would remove the most provocative passages from the Bill.

“I agree that we can’t send a protectionist message,” he said in an interview with Fox TV. “I want to see what kind of language we can work on this issue. I think it would be a mistake, though, at a time when worldwide trade is declining, for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade.”


But read some of the 130-odd comments on the Times article, mainly from Americans - they don't believe in free-trade at all, and this will be a political hot potato. The American public in general is less in favour of free-trade than the European one - in part I think because Europe does have a comprehensive welfare safety net that the Americans do not, so European individuals don't experience the downside of globalisation quite as acutely as the Americans (those strikers in Lincoln should take a trip stateside to see how lucky they are). Obama needs to move full-speed with healthcare reform and the like, because he won't be able to hold the free-trade line without offering some kind of safety-net.

11 comments:

DevonChap said...

Glad you're back Snowflake; I thought you might be too busy causing travel chaos across the South of England :)

For once I entirely agree with your post. I fear the protectionism from the US House Democrats will be shared to some extent by President Obama. If he lets this through it will be the first of many disappointments for those in Europe who saw him as a new light in the World. It may turn out he is not the Messiah, but a very naughty boy.

The wildcat strikes show that the recession is scaring a great many workers. While free movement of labour benefits the economy as a whole individuals do lose out and scared people take actions they wouldn't normally do. I fear that Gordon Brown’s bungled attempt to sooth these fears in 2007 with his "British Jobs for British Workers" line raised unrealistic expectations, despite the rest of the text not implying job protection. As to whether it was dog-whistle politics I'm not sure but it surely was a case of choosing the wrong sound-bite, and that has come back to bite him. Since this line was a National Front slogan before Gordon took it, the BNP will make great capital out of this. They might take a seat or two at the Euro elections in June. That would be a nasty fall out of this recession.

snowflake5 said...

DevonChap - yes - this was always the danger of electing Obama, his views on many things were opaque. That's why loads of the Labour movement supported Hillary Clinton (though of course in the run-off between Obama and McCain, we naturally supported Obama). The thing about Bill Clinton was that he inherited an economy in recession and with a big budget deficit and turned it round using free trade. I don't get why people don't recognise this.

Regarding "fear in the economy" - unemployment is still lower than it was in 1997, and the labour participation rate is very high. People may have worries (stoked by the media who like putting the shrillest doom-mongers on TV), but there was no need for fears to be stoked by Unite. They should have shown leadership.

Gordon Brown's 2007 speech about creating opportunities for British workers, was actually about the union between England and Scotland (anti-Scottishness was running high), not about excluding EU workers. And it was when Bob Shrum was writing his speeches, rather than Alistair Campbell - my guess is that Shrum took the kind of statement that American politicians make all the time and substituted British for the word American. Sometimes expats have a tin ear for local nuances, but Gord should also not have panicked about Scotland and stuck to his policies of the the previous ten years.

Andreas Paterson said...

Hi Snowflake,

As a non believer in free trade, I hope you dont mind me spreading a little free trade atheism about. I personally think that Labour should change the tone of it's rhetoric towards protectionism, because I think that too often the charge against protectionism is led by wealthy business interests rather than governments acting in the interests of their people.

First of all Smoot-Hawley, here I take the view that the role of protectionist tarriffs is overstated as a cause of the great depression, Oliver Kamm mentions someone called Barry Eichengreen who did a lot of work to show this.

On protectionism I think we need a more nuanced approach, I found Gordon Brown and Wen Jiabao's calls to avoid protectionism a little rich given the bailout for the british auto industry and China's numerous protectionist policies. There are lots of policies that could be classified as protectionist and while some can be used dangerously, some can be highly effective.

I worry that this anti-protectionism rhetoric plays into the hands of wealthy financial interests, and that's not something I wan't to see the Labour party doing.

Anonymous said...

Welcome back Snowflake. Very insightful as always.

snowflake5 said...

Andreas - I take a different view from you. Labour has always been a free-trade party - our first government in 1923 scrapped tariffs (but the Tories restored them as soon as they regained office) - for the simple reason that free trade lowers prices for the poor.

You talk about the importance of not enriching "big business" at the expense of the poor, but protectionism transfers wealth from the poor person to inefficient vested interests, who are "big business", it's just that they are domestic rather than foreign. The vested interests don't use their monopoly to cut prices or raise wages, they pocket the benefit they get from having no competition, and often use the opportunity to raise prices. And they usually add insult to injury by producing shoddy goods. In the 1923 election, a big part of why people voted Labour was that the poor resented wealthy agriculturalists lobbying to ban imports and then raising the price of food and they rightly wanted the tariffs removed.

Labour's aim is always to protect the poor and middle classes, and protectionism would result in them being robbed blind.

There might be some justification for a little protectionism in a fledgling developing/emerging economy. But the UK and the USA are mature economies, and protectionism is unwarranted in these cases.

Regarding the bailouts of the banks - these have been done via preference shares that pay the govt interest. Plus the banks will return capital when they are in a position to buy the government out (none want a permanent government stake in their company). The loans to the auto sector also come with interest payments.

The media like to pretend that money is being given or gifted to these parties - but it isn't. We'll get it all back, plus we are charging the banks and co for the use of taxpayers funds. Long term we profit - we will stabalise the economy and get something extra for our efforts.

Andreas Paterson said...

I think we have a fair amount of common ground here although still a lot to disagree on.

I view protectionism as something in the hands of government and the length to which it is abused to favour an industry depends on the character of the government. I don't accept the vested interests because it is an argument against protectionism that favours vested interests not an argument against protectionism per se.

If we work on the assumption of a reasonably benevolent government and ask the question "Can protectionism be used for the benefit of the economy?" I believe the answer is a definite yes, I believe it can be of use to nurture infant industries and to manage economic transition in order to minimize the economic pain. I also think tarriffs are useful for developing countries since they are just about the easiest tax to collect and can be used for social spending.

I believe that governments can generally determine when a use of protectionist policies is useful, as you say trade tariffs are of little use to mature economies. Subsidies and loans are the better policies (although strictly speaking they are still protectionism).

One area we haven't discussed so far is protectionism in the form of investment controls and exchange controls I'd be interested to know what you think of these measures.

PS: Have you heard of Ha-Joon Chang? He's written a lot of stuff on this subject.

snowflake5 said...

Andreas, you say that protectionism needn't benefit vested interests, but it is always vested interests who put pressure on governments to protect them! - usually because customers prefer their foreign competitors products and they can't or won't try to improve quality or price.

In addition governments can't really pick winners - vested interests of the horse and carriage would have wanted those pesky new German cars to be banned at the start of the 20th century. (Actually they got a law passed saying a man had to walk in front of a car with a flag - designed to ensure that the car was slower than the horse and carriage!).

You also get a glimpse of the dangers when you look at the USA. After 9/11 air travel fell everywhere. Airlines in the US pleaded and got government protection and money, but in the EU, the Commission forbade it. KLM merged with Swiss-Air, and the others simply upped their game. They not only weathered the crisis better than the American airlines, they are weathering this crisis better than them too.

Another example - cars - American manufacturers in the 70's and 80's demanded protection against the evil Japanese (and also against European carmakers, but they didn't shout so loud about evil Europeans). The US government responded by slapping a 30% tariff on imported cars. All it did was enable vested interests at GM and co to continue their bad old ways. They are now in much worse shape than say BMW or Nissan. It just doesn't work.

Andreas Paterson said...

Snowflake - On vested interests I think you overestimate their power, if vested interests had had their way, then many protectionist policies would still be in place, they aren't.

On picking winners, I don't think the government is any worse than the market. The market frequently picks losers, it's also worth pointing out that private investors are heavily focused on ROI which means that they often neglect avenues which have high initial research costs or hard to measure outcomes. I would also point to the strategic protectionism used by Taiwan, Korea and Japan to develop specific sectors.

Ultimately competition in a free environment is a far better norm in most cases, but only against equal competitors, but often that is not the case.

GM have fallen behind their competition and can now, no longer compete with foreign rivals. However, a government bailout in this case could trigger investment that will lead to it once again being able to compete. That kind of intervention in my view is better than letting a company go to the wall and putting many people out of work.

snowflake5 said...

Andreas, the reason the government hasn't given in to vested interests is because it is in favour of free trade!

And think about it - the strong companies never ask for help, they are doing nicely thank you. It's the weak and useless who always push for protection.

Regarding picking winners - when I said market, I wasn't thinking about the stock market. Instead I was thinking about the market for goods where millions and sometimes billions of people try out goods and decide by trial and error, which ones to keep buying and which to avoid because they are useless. The government hasn't got the time or personnel to replicate this massive exrimental laboratory. Better to let consumers decide what to buy (and hence which companies survive) than government.

Just to give you another mad protectionism example - the racist Lega Nord, who form part of Italy's government are trying to ban non-Italian restaurants on the grounds that Italian culture needs to be protected. But these restaurants will survive or fail depending on whether people frequent them (the consumer market I referred to above). If people want Italian food they will go to Italian restaurants. It's not necessary for government to intervene - unless said government is racist and is deliberately trying to close down Chinese, Indian and Arab restaurants no matter how successful they are. Not only does protectionism not make sense, it is frequently used by the forces of evil for dark ends.

Andreas Paterson said...

Still here, this debating stuff is fun.

Andreas, the reason the government hasn't given in to vested interests is because it is in favour of free trade!

Yes, but the fact that trade is currently free (ish) is the sign that government has won out over vested interests. If the government were to change it's attitude to protectionism, why exactly would the vested interests suddenly start winning out and getting their way?

And think about it - the strong companies never ask for help, they are doing nicely thank you. It's the weak and useless who always push for protection.

This I reckon boils down into a few separate arguments here. Companies in developing countries lack the expertise and the experience to compete with their counterparts in advanced countries, they are going to need protection while they build up the expertise and skills to compete. Toyota is a good example of this (it originally made automatic looms).

The other boils down to what to do with failing companies, I believe that it is often worth the government stepping in to save failing businesses if they are viable and preserving much of the capital of those businesses. Rover is the one that comes to mind here.

Regarding picking winners - when I said market, I wasn't thinking about the stock market. Instead I was thinking about the market for goods where millions and sometimes billions of people try out goods and decide by trial and error, which ones to keep buying and which to avoid because they are useless. The government hasn't got the time or personnel to replicate this massive exrimental laboratory. Better to let consumers decide what to buy (and hence which companies survive) than government.

I know what you mean't Snowflake, and I'd still argue that there is an inherent bias in any market. For example, I think that the government's policy of inflation targeting has acted as incentive for institutions to sell debt because it has dramatically reduced the risk in this activity. There are in my view always government policies that will introduce a distortion into the choices of entepreneurs. The state can make often educated guesses and desirable sectors and distort the market in their favour.

I think there are a number of good examples of this kind of state planning, Japan with it's specific protection of certain sectors had huge successm, Germany has had a lot of success encouraging green technology. There are also a number of specific companies that owe their origin to state intervention: EMBRAER (Brazil), Singapore Airlines (still 51% owned by the government), POSCO and Renault for example.

I also think it's worth pointing to the amount of business

Just to give you another mad protectionism example - the racist Lega Nord, who form part of Italy's government are trying to ban non-Italian restaurants on the grounds that Italian culture needs to be protected. But these restaurants will survive or fail depending on whether people frequent them (the consumer market I referred to above). If people want Italian food they will go to Italian restaurants. It's not necessary for government to intervene - unless said government is racist and is deliberately trying to close down Chinese, Indian and Arab restaurants no matter how successful they are. Not only does protectionism not make sense, it is frequently used by the forces of evil for dark ends.

Italian restaturant's will survive as long as romance in my view, no need to protect em in my view. I don't support such protectionism and don't see why anyone should. I see protectionism as a useful weapon in the tool in the government's policy toolkit, a means to an end and not an end in itself.

snowflake5 said...

Andreas, you really think the government should have intervened to protect Rover?!!! You've shot your argument to pieces just there. Rover died in the middle of the boom, when people were willing to buy cars, as long as they were well-made, reliable and looked good.

Unfortunately Rover was owned by a bunch of tossers, who borrowed large amounts of money, not to upgrade their R&D and design new models, but simply to pay themselves massive bonuses and salaries. And then they spent most of their time on the golf-course, while their salesmen tried desperately to sell out of date models. To bail them out would have been to reward them for their failures. Better to let the company go bust, the workers found other jobs (it was the boom after all).

Most companies that go bust do so because they are crap. It's only in the rare instances in the middle of a deep recession when some companies may struggle not because they are poorly run or are unviable, but because of problems getting cashflow due to banks restricting credit in a fright or some such thing. In these cases it is OK to help them, and indeed both the government and the European Investment bank are offering loans and support. But other than that, the government should butt out.

Regarding inflation-targetting - this is not the main reason companies took on debt. Most did so because the stock market was pressuring them to "sweat their assets" and return cash to shareholders. So many companies borrowed to repurchase shares, which in theory increases the earnings and dividends per share, but in reality, it depletes the reserves in the company and increases fixed costs (servicing debt), which leaves them vulnerable in a recession.

It's no accident that firms that are not listed on the stock exchange have lower debts, eg John Lewis, as well as some privately owned family businesses. But that is down to them not being subject to the pressures from analysts in the City.

There is stuff about the current system that doesn't work (especially for companies that are listed on the stock exchange and subject to pressure from the hyenas of the City), but free-trade and keeping inflation low is not the cause of the problem.