We're in for a wild ride. Exponentially accelerating technological, cultural, and socioeconomic evolution means that every year will see more developments than the previous one. More change will happen between now and 2050 than during all of humanity's past. Let's explore the 21st century and ride this historic wave of planetary transition with a confident open mind.

Monday, September 21, 2009

Protectionism Works

Protectionism is what made every historically major country wealthy and powerful in the last 300 years (including the current free trade pushers like UK and USA). Protectionism should stop being a bad word as Japan and China can testify

The title may make the reader shake head immediately because a kind word is not often found with "protectionism" in the same sentence these days. Although United States industry was essentially built on protectionist tariffs (until 16th amendment of 1913 allowed federal government to start functioning via income tax instead of high tariffs on imports) the last 30 years involved continuous top down push of free trade propaganda. It is thus understandable that protectionism brings a negative psychological reaction even if there aren't ready made arguments to explain why.

If one looks at how world's key societies rapidly became wealthy and powerful (in the last 300 years), protectionism was always the dominating factor to help out native industry. France and England in 18th-19th century, United States, Japan, and Germany in 19th-20th century, and China in 20th are just some of the success stories.

In fairness, we can't overlook a number of small (population and physical size) states that are positioned to thrive in free trade by their geography (ocean reliant ports of Singapore, Hong Kong, Netherlands and Switzerland with its base in ancient Alps trading routes) which often also function as financial hubs. As far as large historically active players on the world stage, all became what they are due to basics like tariffs.

One may begin to argue that protectionism of old was different in that it was an ideological pillar of now "discredited" mercantilism. However, mercantilism never went away and still works wonderfully in more advanced forms in China and Japan (and even in Western Europe to a certain degree). Certainly we can understand the desire of a state to lower protectionist measures once its industries have sufficiently grown and benefited from them. We have seen England begin to push free trade propaganda in 19th century after its factories became the best in the world. Same pattern continued with United States (which had some of the most advanced and some of the only factories left standing) after World War 2.

One would think that United States would learn a lesson from slow decline of British Empire (late 19th century to 1960s) due to transition from mercantile protectionism to free trade and reserve currency imperialism. Surely it would have affirmed that lesson from the rapid rebirth (after the initial breathtaking success of their mercantile industrial expansion in late 19th century) of Japanese and German societies in the 1950s ad 1960s. It was crystal clear what works for national enrichment, job creation, national self respect, technological progress, and higher quality of life for the average citizen.

It can be summarized as follows:

1) Tariffs work, keeping out foreign competition and their advanced imports such as cars works, trade barriers work, high import duties work, allowing foreign companies to set up shop only in partnership with native companies/unions works

2) Free trade doesn't work as well as trade barriers historically when it comes to rapid national development and can even fatally drain a nation

For a number of years before the current economic depression hit, many old time free trade warriors like Nobel prize winning neoclassical economist Paul Samuelson began to realize that the global reallocation of industry can produce a domestic win-loss scenario for United States (especially in its trade contact with protectionist China) where the loss is so great as to be socially catastrophic. Samuelson used to have absolute faith in comparative advantage but his most recent major paper argues that free trade theory needs to be reformed for the modern world if it is to survive. Samuelson is too old (94) to meaningfully contribute at this point but major reallocation of his thought at this age shows the seriousness of free trade problems. One translated Der Spiegel interview has him mouth the thoughts familiar to anti-WTO protesters: that rising economic inequality within "globalizing" nation is a type of win-loss scenario that is unacceptable and stupid to be allowed to happen.

Another crusty dinosaur, Alan Greenspan, has mentioned a few years ago how rising inequality can threaten democratic functioning of United States. When free marketeers and capitalist internationalists utter words like these, it's the equivalent of John McCain saying that perhaps United States naval forces should be cut down in size. It's the equivalent of the Pope saying that perhaps some birth control should be introduced into church doctrine to save lives. Some of American elites (mostly in the nationalist democratic wing of the American oligarchy) have taken notice of this.

At this point, rapid and badly needed protectionist measures may shock United States into falling further into the economic abyss. Chinese retaliation and corresponding rise in cost of imports will not help United States get further away from risk of a hyperinflationary scenario. It would thus make sense for Barack Obama to sneak in defensive nationalist measures gradually. His recent decision to to impose a tariff on Chinese tires may be beginning of such an attempt. Tariffs on foreign made car batteries and materials/parts connected to industries decided to be"strategic" ( like green energy ) may follow. The way protectionism is introduced by the current administration will be vital for any chances of American rebirth within a generation.

When pound sterling began declining as reserve currency in the 50s and 60s along with British industry, London decided to cut off its foreign colonies for purposes of national regeneration and survival. United States needs to begin a similar process of disengagement from the world to match decline of the dollar as reserve. Since British Empire and United States were both in strong imperial position at the time of their full commitment to pushing free trade on the world, they found it easy to combine lack of protectionism with parasitic existence of unproductive consumption through the use of reserve currencies. In that sense, free trade "worked" for them for a while even as it impoverished small countries that were pushed to engage in it. This period is now coming to an end and a new model has to be formulated.

Some Europeans, like Emmanuel Todd, propose "protectionism on a continental scale" (the article is in French but is very readable with google translate). It may be argued that China already practices that to a degree in that it has the population and economy large enough for import restrictions without being crushed and impoverished. European Union definitely has what it takes for such an action especially if it coordinates with some nearby states like Russia. North American Union and South American Union may one day be such entities to effectively fight off Asian and European imports. Trade cannot be decoupled from production and effective production needs to be able to compete between itself rather than just exist in one part of the world where it's cheapest.

Let's hope some common sense prevails and more people question official orthodoxy of global unification by only one narrow "inevitable" route (the optimism of Thomas Friedman is now laughable in hindsight). Real globalization seems a lot more within reach when self enriching, wealth producing, continent wide economic unions do business with one another in a more equal way.

Lets remember what the 25th president of the United States William McKinley said about free trade at the end of 19th century when he affirmed a commonly held belief among American elites and citizens,

"Under free trade the trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man. [It is said] that protection is immoral…. Why, if protection builds up and elevates 63,000,000 [the U.S. population] of people, the influence of those 63,000,000 of people elevates the rest of the world. We cannot take a step in the pathway of progress without benefitting mankind everywhere. Well, they say, ‘Buy where you can buy the cheapest'…. Of course, that applies to labor as to everything else. Let me give you a maxim that is a thousand times better than that, and it is the protection maxim: ‘Buy where you can pay the easiest.' And that spot of earth is where labor wins its highest rewards."

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