Protectionism does not create job, but destroys it

NOT only the Bangladeshis, but also the Americans do not learn from the history! If we go back to 1930s, we will see that three of the Uncle Sam's attempt led the World to the Great Depression: (1) Tighter monetary policy during the depression which allowed to fall money supply at least one third; (2) In 1930 when the world economy was sinking as it is today, the US Congress passed the Smoot-Hawley Tariff Act, which essentially shut off imports into the US Consequently, United State's trading partners also retaliated, and world trade plummeted; and (3) President Herbert Hoover made the situation even worse by signing a "Buy America Act" requiring all federal government projects to use only American manufactured materials. Thus, the truth is US government's intervention in 1930s in fact prolonged depression. Now, it's time to say that history really repeats itself.

The Federal Reserve chairman Ben Bernanke is also a student and researcher of the great depression. So, he already flooded the market with liquidity, and kept interest rate near zero. But what are the US politicians doing? The House of Representatives' version of the economic stimulus bill, contains a provision, "Buy American", requires that all "manufactured goods" bought by taxpayers for the stimulus be produced domestically. "Buy American" bill contains stronger anti-free-trade provisions, for instance, foreign steel in federal projects would only be allowed if domestic products were either unavailable or drove up the cost of the projects by 25 per cent or more.

We know that world trade allows both parties to be better-off by importing inexpensive commodities from country A, and selling them our commodities on which we have comparative advantage over country A. However, as the world-wide recession leading to depression deepens, protectionist sentiments get a boost to "save" jobs. But, Princeton Universities Economics Professor, Burton Malkiel, in one his article on the Wall Street Journal says, "No one person's benefit can compare with the loss felt by the displaced worker. But the total benefits do exceed the costs. And competitive markets have spurred the innovation revolution that has made the US the economic powerhouse that it is." He also added that the solution for the displaced worker is job retraining and adjustment assistance, and to improve the safety net available to displaced workers during the transition period.

Policymakers neglected the fact that "Buy American" provision invites retaliation by other nations too. Though more than 50 nations are covered by treaties with the United States, and thus may be entitled to exceptions to the restrictions, many of those countries, and the European Union (EU), have issued protests about the proposed legislation. The EU has already declared that it will not stand by idly if the US violates its trade agreements and its obligations to the World Trade Organization (WTO). Since the US is the biggest exporter in the world, retaliation could cost America more jobs than the proposed provision would create.

In October 2008, when the US met at an emergency meeting in Washington with the world's 20 largest economies, all countries agreed on "the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty." Surely most of the parties forgot their promise just like before. The EU nations have reversed direction and tightened their own trade rules, for instance by resuming subsidies to dairy farmers' exports and effectively barring Chinese screws and bolts from their market, while accusing China of dumping them below cost. As a step towards retaliation, the US is planning retaliatory tariffs on Italian water and French cheese to punish the EU for restricting imports of U.S. chicken and beef. India is proposing to increase tariffs on foreign steel at the request of its steel industry. Thus, global trade is expected to shrink by more than 2.1 per cent this year after growing by 6.2 per cent in 2008, according to the WTO. International trade analysts say the current rash of trade constraints could make it harder for global economic growth to recover from the current downturn.

If we rephrase Thomas Hobbes, a political theorist from the mid-17th century, we can say that not only individuals but also countries are motivated by self-interest., and the unrestrained pursuit of self-interest would result in chaos. Regulatory body, here the WTO, with its power to coerce countries, was necessary to bring order out of chaos. Unfortunately, the WTO is as powerless as the United Nations (UN). But, yes, if all the countries worked together and coordinated with each other, all the nations would have been better off. Protectionism in the name of "Buy American" will surely destabilize trade and capital flows, and it also risks turning a global recession into a 1930s-style great depression.

On January 30th, 2009, at the World Economic Summit in Davos, Switzerland, British Prime Minister and Labour Party head Gordon Brown said that protectionism will lead to "longer and deeper" recession. He also said, "Protectionism protects nobody, least of all the poor." He is right. Protectionism will simply destroy jobs, not create them, and poor people in this world will experience most of the pain.

*This article was published on the daily Financial Express in Bangladesh on February 12, 2009.