Protectionism US style

["Ulhas Joglekar" <joglekarulhas@xxxxxxxxxxx>]

The Economic Times

Wednesday, May 08, 2002

Protectionism US style

Joseph Stiglitz

AMERICA'S imposition of tariffs on imported steel has been greeted with a
howl of protest around the world. But harsh words have not been followed by
a strong counter-attack. Now is the time to confront America's hypocrisy,
not to bluster.

The global financial crisis of 1997/1998 - mismanaged by the IMF, largely at
the direction of the US treasury - led to an increased flow of steel
imports.

But that is part of the market adjustment process the US trumpets so loudly
at other times.

The argument put forward by the US, that it was entitled to safeguard
against a surge of imports - utilising safeguard measures that are part of
the WTO - is unlikely to pass muster with a WTO panel when one is eventually
convened, but the argument itself is disingenuous.

Europe pushed to restructure its steel industry in the 1980s and early
1990s, and succeeded mostly. In America, many efficient new firms
(mini-mills) were indeed created, but yesterday's lumbering giants stood
still.

They cannot compete with efficient steel mills elsewhere - including (perish
the thought) Korea's state-owned steel company.

Many of America's problems are made in USA. America's deteriorating fiscal
position is leading to a strong dollar, just as the deteriorating fiscal
position of the US after Reagan's irresponsible tax cut of two decades ago
did.

While countries may pride themselves on a strong currency, a strong dollar
is bad for exports and good for imports.

In a dynamic economy, if jobs are lost in one sector, new jobs are being
created in another. Government's role is to facilitate the movement of
labour from one to the other.

It is a primary responsibility of government to maintain full employment.
Both in assisting shifts in employment and in maintaining full employment,
the Bush administration has failed.

President Bush recognised that a fiscal stimulus was needed when he arrived
in office, but rather than pushing for genuine stimulus, he pushed for
regressive tax changes under the name of a fiscal stimulus.

Aid to old economy firms that spent more on avoiding taxes than in
restructuring took the form of a repeal of the alternative minimum tax, a
tax provision designed to limit the extent to which firms could make use of
loopholes in the tax code.

Under the Bush administration's original proposal for lowering taxes, a
family of four earning $50,000 would have received zero - yes zero -
benefits over four years, while a $5 million dollar a year family of four
"struggling to make ends meet" would have received a whopping $500,000!

The Democrats rightly resisted; the number of jobs that would have been
created was minuscule. But the weaknesses in the economy as a result of this
economic mismanagement meant that those who lose their jobs will face a
tougher time.

While America loses, Europe loses, many in the developing world lose, and
much more is at stake. Globalisation, well and equitably managed, can
benefit all countries.

But under globalisation, as currently managed, many have not gained; and
some of the poorest have lost out. Instead, globalisation is an unfair game,
with the rules written by rich advanced industrial countries for rich
industrial countries.

But the US believes that even this is not enough: it will interpret these
rules in ways which suit its political interests, bending and breaking them
at will, challenging those who do not like it to do something about it. The
motto of the Bush administration seems to be, "Trade is good, but imports
are bad!"

Think of the lessons that poor developing countries learn. Lowering import
duties lead to a surge of imports. So, under the "new" US rules, that
country is entitled to reinstate tariffs as "safeguards."

If the US needs to worry about unemployment with an unemployment rate of
less than 6 per cent, what is a poor country with unemployment at 10 or 20
per cent to say?

The US pleads for understanding: elections are coming in November, and
voters in West Virginia and other states must be "bribed" to accept a new
round of trade negotiations.

But democracies exist across the developing world, and their voters have
even more legitimate concerns about the jobs that result from
liberalisation.

The IMF - in which the US is the only country with veto power - shows little
sympathy with such political concerns in the developing world. Why the
double standard?

If the increase in steel tariffs were an isolated incident it would be bad
enough. But, while preaching free market doctrines abroad, the US bails out
its airlines and increases agricultural subsidies at home.

Even before these increases, subsidies to agriculture by the advanced
industrial countries were enormous - exceeding the total incomes of
sub-Saharan Africa.

The rich effectively close their markets to many goods that represent the
comparative advantage of the poor. Argentina's economic position today,
indeed, would be vastly different if America and Europe opened their markets
to its agricultural goods. The same can be said for country after country in
the developing world.

Globalisation entails increasing interdependence. Given the volatility in
the global economy, this entails bearing some risks. Rich countries - like
the US - are in the best position to bear those risks.

Much discussion has taken place of late of the advantages to be gained by
the world adopting global standards, e.g., in banking. Inevitably,
globalisation will entail adopting such standards.

America's actions over steel seem to suggest that the US embraces a double
standard. This cannot be allowed. Countries, particularly in Europe, that
are capable of standing up to the US must oppose it.

Taking strong measures will be in their interests, will be in America's
interest (even if it is not in the interests of particular special
interests, or President Bush's political interests), and will be in the
broader interests of the world.

(The author is Professor of Economics at Columbia University) (C): Project
Syndicate, April 2002

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