July 12, 2004
by Irwin Stelzer
All those Europeans who live for the day when John Kerry will be sworn in as the 44th president of the United States should have paused before cheering the polls that show that Kerry's selection of John Edwards as his running mate has given the Democratic ticket a real boost.
Edwards was the leading proponent of protectionism during his losing campaign for the presidential nomination. He lost, but Kerry won in part because he out-Edwardsed the young senator from North Carolina by accusing businessmen who outsourced jobs of betraying America.
It is Kerry, of course, and not Edwards, who will determine trade policy should the voters decide to sentence George W. Bush to join his father in retirement. But Kerry's choice for vice president shows that he believes some form of protectionism to be a vote winner, and a necessary pay-off to the trade unions that are putting their foot-soldiers and cash to work to get pro-Kerry voters registered and to the polls.
There is special irony in the massive support for Kerry in the UK. Just last week the British Government argued in a policy paper that the old mercantilist mantra, "exports good, imports bad" has passed its sell by date. It is that sort of mercantilism that Bush is trying to persuade American voters is against their interests. Which is why he has been pushing for a new global trade liberalizing round, and negotiating bilateral trade-opening deals along the lines of the North Atlantic Free Trade Agreement (NAFTA).
Kerry has promised to re-examine and tighten all existing treaties, and to insist on labor and environmental terms in new agreements that would most certainly disadvantage the developing countries that are supposed to be the object of the affections of Europe's left. With the exception of France, of course, which clings to agricultural protectionism that dooms Africa's poor to perpetual poverty.
Kerry's ire is aimed especially at the Central American Free Trade Agreement (CAFTA) that Bush has negotiated and that is now before congress. That agreement would eliminate duties on more than half of U.S. farm goods and 80% of American exports of consumer and industrial products to Costa Rica, El Salvador, Honduras, Nicaragua, Guatemala and, eventually, the Dominican Republic. Kerry has asked congressional Democrats to withhold approval until he can revise the agreement to make it more acceptable to the trade unions.
America's voters might just be inclined to heed the siren song of the respectable protectionism that Kerry sings. Recall: when hard right Pat Buchanan tried to sell his brand of outright protectionism, Americans weren't buying. Kerry is subtler: adjust the tax code to make overseas investment relatively less attractive; penalize outsourcers; include in trade agreements provisions that wipe out the labor-cost advantage of poor countries; stall on reopening the Doha round of trade-opening negotiations.
All wrapped in the personable package of John Edwards, who proved his ability to persuade middle-class Americans that he is on their side during his successful career as a trial lawyer. A Gallup poll shows that 83% of Americans believe that the job impact of outsourcing is an important issue in this year's election, and 47% fear that they or a friend or relative will lose their job to overseas competition. Kerry and Edwards plan to preach to that choir.
They do have some facts on their side. America's trade deficit, now running at over 5% of GDP, is unsustainable. Sooner or later, the dollar will decline in value, making American exports cheaper, and imports dearer. But that day is being postponed by the insistence of Japan and China on intervening in currency markets to prevent the value of their currencies from falling, and the price of the goods they export to America from rising. The Bush administration has been singularly unsuccessful in persuading these important exporters to America to stop supporting the dollar.
The Democrats can also point to the refusal of the European Union, and most particularly Germany, to stimulate economic growth by lowering interest rates and reforming their rigid labor markets. This means that Germany and others are relying on sales to America, rather than growth in domestic demand, to fuel their economic recoveries. They are pursuing an export-led expansion, with America the consumer of last resort, and stunted European markets that have little demand for imports from America.
Unfortunately, Kerry has made it clear that he intends to court the goodwill of Europe, a policy hardly consistent with pressuring the French and others to stimulate their economies and to open their markets to American goods. So he will have to find ways to reduce imports, especially from the Asian countries that are the largest contributors to America's trade deficit. That will force China and Japan to divert goods to Europe -- the very area that sees the Massachusetts senator as such a wonderful alternative to the Texan president. Even now, a group set up by the European Commission is proposing drastic cuts in textile imports from China and India, and a change in rules to make it easier to file anti-dumping cases at the World Trade Organization.
All of this comes at a time when Bush has decided that his flirtation with protectionism -- remember the steel tariffs -- damaged rather than helped the American economy. He has rejected demands of several members of congress to renew the international quota system that has limited the access of overseas textile and apparel manufacturers to American markets. Those quotas will expire on January 1, 2005. He has instructed the Department of Commerce to reduce tariffs imposed on Chinese television sets to inconsequential levels.
Bush's record as a free trader is hardly unblemished: just last week his Commerce Department imposed high tariffs on shrimp imports from China and Vietnam. But were Adam Smith alive, and voting, he would surely feel that the incumbent has a comparative advantage over his challenger.
A version of this Update appeared in The Sunday Times (London)
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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