The Wrong Side of History: The Bush Administration’s Bad Trade Policies

By Scott B. MacDonald

One of the more ironic twists in recent history is the existence of a Republican White House happy to embrace protectionism. The Republican Party traditionally has been the flag waver for free trade. Both the Free Trade Agreement (FTA) with Canada and the subsequent North American Free Trade Agreement (NAFTA) with Canada and Mexico were the products of Republican administrations (though the latter was brought into law by the Clinton presidency). Consequently, it is strange that President George H. Bush was a free trader and his son President George W. Bush is a protectionist. Clearly the current Bush administration’s embrace of protectionism is all the more worrisome because the global economy is in a fragile recovery, which could be undermined by a potentially damaging trade war.

The sparks for that trade war are the wrongheaded decision in March 2002 to protect U.S. steelmakers and the Bush administration’s more recent November 2003 move to put limits on Chinese textiles. There is the possibility of Japanese sanctions on U.S. imports, adding to a $2.2 billion retaliation list the European Union will impose on a range of American products in December unless Washington agrees to lift the trade restrictions on steel in early December. In March, the EU has to decide whether to begin phasing in $4 billion of duties on U.S. products, from leather goods to nuclear reactors to pressure U.S. legislators to scrap tax breaks the World Trade organization says violates export-subisidy rules. In addition, China could slap duties on U.S. goods in response to U.S. limits on $500 million worth of textile imports.

Trade remains a critical element of the U.S. and global economies. Millions of U.S. goods are linked to trade, both in manufactured goods and in services. Linked to that is a vast inflow of foreign capital, attracted to the relative stability of the United States. Free trade also implies free movement of capital, something that the American economy has been strong in attracting. While free trade played an important role in developing the U.S. economy, it has also played a significant role in the development of the European Union and much of Asia and helped open up Central and Eastern Europe in the aftermath of the Cold War.

Trade, however, has become a political hot button in the United States. The Bush administration has been taken to task by the public for the loss of 2.7 million manufacturing jobs, mainly to China. For part of the American public, free trade has come to equal job losses, dramatically captured by the media in the form of closed factories and sad-faced ex-workers, and captured by angry social commentators like Michael Moore. The Democrats have also sought to cash in on the angst of the displaced American worker, pointing to the unfeeling nature of the pro-business Bush administration.

For its part the Bush administration is pro-business. This, however, needs to be clarified. In many regards, the Bush White House is more populist than other prior Republican administrations. It distrusts Wall Street and favors big business in the form of manufacturing, hence the attraction to protectionism. The general lack of any major figures from Wall Street, with the exception of Bill Donaldson at the Securities Exchange Commission, is evident as is the preference for people from manufacturing and other large non-financial enterprises. Look at the background of the last two Treasury secretaries – neither comes from Wall Street, rather a commodities-oriented business and transportation. And the Bush administration is presiding over one of the most sweeping re-regulations of the financial industry in decades. Like the Democrats, the Bush White House is comfortable with more regulation and protectionism. The danger is that in the upcoming elections the Democratic presidential candidates and President Bush vie to be the most protectionist, the most willing to protect the little guy and gal.

This view of free trade as bad blithely ignores U.S. history. One of the important aspects of the U.S. Constitution was that it allowed interstate trading. This clearly had an impact on economic development. Take the rise and fall of the textile industry in New England. In the early 19th century the New England economy boomed with the advent of new technology that allowed it to become a major producer of textiles. Times changed. The higher cost of labor eventually led to a transition of the textile industry out of New England and into the southern United States. In the south textiles helped elevate local economies and gradually had an impact on a better standard of living. Although many parts of New England went through difficult periods of dislocation in the form of unemployment and economic decline, the regional economy eventually moved to another set of industries, including aerospace, defense and insurance. Both New England and the south adjusted and became parts of the greater trading bloc that was the United States, each benefiting. Without the free movement of goods, capital and ideas, it is doubtful that such changes would have occurred and perhaps instead local economies would have remained much more static, much less prone to advance.

In a recent speech by St. Louis Federal Reserve President William Poole, the point was made that certain industry groups are able to apply their political power to gain protection, “usually because those who bear the costs of protection are inadequately represented in the political process.” It would certainly appear that the steel and textile industry has this organized form of political access as does energy. Steel and textile workers also offer a lot of votes for a president seeking re-election. From a short-term political standpoint, pandering to those seeking protectionism will draw votes. The logic is simple – foreign workers and businesses do not have votes in the United States, but steel and textile workers do.

Protectionism is a short-term solution to longer-term structural problems. Japan has spent the last couple of decades seeking to protect its inefficient agricultural, retail and construction sectors from foreign competition. This has been done at the cost of the rest of the economy, reflected by economic stagnation and higher unemployment, despite the dynamic nature of the export sector. In the United States, trade protectionism will protect inefficient industries and save jobs, but will hurt export-oriented companies such as Boeing, Caterpillar and Ford. It is also adding costs for a number of domestic sectors such as autos that have to pay more for the higher costing U.S. steel. And finally, the consumer pays more when he or she goes to buy a product made with artificially higher priced U.S.

Bush trade policies are increasingly an echo of the Smoot-Hawley Tariff Act of 1930. The original intention of that act was to increase the protection given U.S. farmers against foreign agricultural imports, which had risen massively in the aftermath of World War I. This development was due to the production of farm products outside of Europe during the war and, with the postwar recovery of European producers, to huge agricultural production surge during the 1920s. With a vast uptick in supply, farm prices plunged in the late 1920s. Republican Presidential candidate Herbert Hoover in 1928 vowed to assist the beleaguered farm sector by augmenting tariff levels on agricultural products. The problem was that once the tariff schedule revision process commenced, it snowballed as calls for greater protection came from industrial sector special interest groups. Eventually a bill intended to bring relief to farmers became the vehicle to augment tariffs in all sectors of the economy. As one U.S. official document stated: “When the dust had settled, Congress had agreed to tariff levels that exceeded the already high rates established by the 1922 Fordney-McCumber Act and represented among the most protectionist tariffs in U.S. history."

What is at stake with the current round of protectionist policies are global trade and the health of global capitalism. The transatlantic trade is worth $600 billion annually. Global trade is worth $8 trillion a year. China and Japan are two of the United States major export markets. The Europeans, Japanese and Chinese are also some of the largest holders of U.S. Treasury bonds and agency paper. Because of the large fiscal deficit the United States still needs buyers of its debt to finance its red ink. Considering that U.S.-European relations are already frosty over Iraq and the United Nations, the rise of the trade issue to a front-burner does little to restore a sense of stability, necessary for trade and commerce to flourish. The United States has long purported to be a called a free trade nation, with an economy based on selling goods and services around the world. The current Bush trade policies betray this tradition and clearly trade potential short-term political gains for longer term losses. In many cases, President Bush has been unfairly portrayed as a modern day Hubert Hoover – well-intending, but hapless in pulling the country out of its economic problems, indeed only prolonging the misery. In terms of trade policies, Bush is increasingly looking like Hoover, something he should consider as he looks down the road beyond November 2004. He can either be looked upon in a historical sense as Ronald Reagan, who helped push along the FTA, or Hubert Hoover, lost in the maze of the Smoot-Hawley Tafiff Act.

Scott B. MacDonald is a Senior Consultant at KWR International, Inc. KWR International is a consulting firm specializing in the delivery of research, public/investor relations and advisory services.