Trading on the Recession

China recently overtook Japan as the second largest national economy in the world. Thirty years ago, when China began liberalizing its economy under the leadership of Deng Xiaoping, it was one of the poorest nations in the world. China has come a long way since then. Millions of its citizens have been lifted out of poverty. Yet in the West, many advocates of protectionist trade policies see Chinese prosperity as a threat, rather than an opportunity.

The world has made tremendous economic progress in recent decades thanks to freer international trade. The movement of goods, services, capital, and people across borders has led to increasing prosperity. That is why American backsliding on trade liberalization since the beginning of the Great Recession is so worrying. Candidate Obama was muddy on his stance on trade during his campaign for the presidency. Today, his administration’s approach to trade wavers between neglect and protectionism.

An estimated 8 million jobs have been lost in the United States since early 2008. For politicians seeking to place blame elsewhere, international trade — and trade with China specifically — make for a convenient punching bag. Preventing jobs from being “shipped overseas” — as if jobs were fixed goods — is a common talking point amongst politicians across the political spectrum. And organized labor’s opposition to liberalized trade has helped make it untouchable by Democratic politicians, who rely on significant union support in their campaigns.

Negotiated trade agreements — with Colombia, Panama, and South Korea — all await Congressional approval. Aside from a potential resolution of the South Korean agreement, no progress is expected anytime soon. Predictably, special interests have found problems with each agreement, from environmental and labor concerns to accusations that foreign countries “unfairly”  promote exports.

The economic stimulus bill included many “Buy American”  provisions. These arcane rules prohibit construction projects funded by stimulus money from importing raw materials, even when they cost less than if acquired from domestic producers. (After Canada complained, the administration carved out an exception to this provision for Canadian companies in exchange for U.S. access to other Canadian markets.) And last September President Obama signed a bill increasing tariffs on tires imported from China, a move that was widely seen as a gift to Big Labor unions and was strongly denounced by our trading partners.

 Now the protectionists are turning their attention to stringent enforcement provisions in existing trade agreements, hoping to use those as de fact trade barriers. Last week, the U.S. government filed a complaint under the Central American Free Trade Agreement with Guatemala over their failure to uphold labor laws written into the trade agreement. The alleged violations include the illegal firing of union workers and the failure to engage in collective bargaining. This was the first time a country has filed a formal labor complaint over a free trade agreement (possibly under union pressure). There is considerable danger in all this. Even small tariffs can lead to retaliation, resulting in protectionist wars.

Protectionist policies are gaining traction in labor markets, too. In the United States, many hurdles are being erected to obstruct their lawful movement. Earlier this year, the Department of Labor (DOL) raised the hourly minimum wage for foreign farm workers on H-2A visas to $12.24. Additionally, background checks are now mandatory for all immigrant farm workers, at the employer’s expense, and all existing contracts must be redrafted according to these new rules. The total cost runs to thousands of dollars per employee.

For the H-1B visa, which covers highly skilled foreign workers in specialty occupations, the U.S. Customs and Immigration Service (USCIS) scheduled 25,000 surprise workplace inspections in 2010 — a fivefold increase from the previous year. While such inspections aren’t prima facie protectionist, they cause severe workplace disruptions that can often shut down operations for hours and sometimes more than a day. 

At the beginning of the Great Depression President Herbert Hoover signed the Smoot-Hawley Tariff Act and an executive order choking off all legal immigration into the United States. International trade and the flow of people collapsed catastrophically, adding to the misery of the Depression. The Obama administration has not blundered in such spectacular fashion, but a thousand legislative and regulatory cuts could savage the economy if they continue unabated.

To revive economic growth and increase global prosperity, the United States and other governments need to recommit themselves to freeing up trade in goods and services, as well as the movement of people across borders.