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In Bad Economy, Countries Contemplate Protectionist Measures

February 19, 2009 at 6:10 PM EDT
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Across the globe, many countries are taking protectionist measures to buffer national economies from the ongoing economic downturn. Experts debate the potential effects of a trend toward protectionism.
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JEFFREY BROWN: It’s not only between the U.S. and Canada that trade is becoming a critical issue. In hard times — and in some cases, in response to worker protests — governments around the world are acting or threatening to act to prop up their own companies and workers. Are such moves appropriate? Or do they signal a shift toward protectionism?

We talk about all this now with Fred Bergsten, director of the Peterson Institute for International Economics, and Thea Lee, policy director and chief international economist at the AFL-CIO.

Welcome to you both.

FRED BERGSTEN, Peterson Institute for International Economics: Good to be here.

JEFFREY BROWN: Fred Bergsten, let me start first. To what extent do you see the trade issue becoming a source of friction as the global economy weakens?

FRED BERGSTEN: I think the trade issue will become a major source of friction, both among economic relations, but between countries more broadly.

Over 30 countries have put in new trade barriers just since the Group of 20 had its summit meeting here in Washington back in mid-November. Most of those are minor to date, but it’s clear that, as the recession deepens and broadens, this is going to be a very, very profound issue.

Countries around the world are going to be tempted to try to export their problems to their neighbors, try to close their markets and create jobs at home at the expense of others.

The problem, of course, is that it won’t work. As the president says today in Ottawa, this is a global crisis. All countries are suffering downturns.

So any country that tries to export its problems, export its unemployment, create jobs at the expense of others is going to face instant retaliation by others, and the whole trade system will spiral downward. It just won’t work, but it could become a major friction point between a lot of countries.

Danger of protectionism exaggerated

Thea Lee
AFL-CIO
Right now, the key thing, as Fred said, is to get the global economy going again. And countries have to come into -- step up to the plate and take the appropriate measures.

JEFFREY BROWN: All right, let me come back to the "will it work" or the consequences. First of all, do you see it growing, in terms of the friction between countries?

THEA LEE, chief international economist, AFL-CIO: No, I mean, there's always going to be a lot of pressure. And a lot of national governments are struggling to get their own economies out of the trouble that they're in.

But I think it's a little bit of a distraction, a little bit of an exaggeration just how big a danger protectionism is. Right now, the key thing, as Fred said, is to get the global economy going again. And countries have to come into -- step up to the plate and take the appropriate measures. And I think one of the things that's missing right now is the kind of international coordination, macroeconomic coordination.

But I think that the small steps that have been taken, where countries are looking to protect their own workers and their own firms, are very minor in the scheme of things. What's much more dangerous is if we have a prolonged global recession where countries don't take the appropriate steps to stimulate their own economies.

JEFFREY BROWN: Well, what's an example -- but make this concrete. Give us an example of something that countries have done or are thinking of doing that would be a problem.

FRED BERGSTEN: I think the best example was when the Congress here contemplated and then in the House of Representatives enacted some "buy American" preferences for U.S. products under the fiscal stimulus legislation. That was really just a threat of action -- it was not implemented action -- but it set off a firestorm around the world.

JEFFREY BROWN: Including, we saw today, in Canada.

FRED BERGSTEN: Canada, the European Union, all of our major trading partners immediately erupted, threatened quite explicitly to retaliate if the United States did it.

Quite appropriately, then, President Obama stepped back, urged the Senate to change the language so as to be sure it was consistent with our international obligations. The Congress did that. That's the way the bill was signed.

Even that, I have to say, doesn't solve all the problems, because there will be under that stimulus legislation, under its "buy America" provision, some increasing discrimination against foreign products. And that, in turn, could lead to the kind of spiral I talked about.

JEFFREY BROWN: But do you see "buy American" and those kinds of actions differently?

THEA LEE: I certainly do. And I think we have to make a distinction between protectionism in a sense of raising tariff barriers and -- and stopping trade and government procurement decisions, where governments choose to spend their own tax dollars in a way which is targeted towards creation of good jobs at home. And it's actually a rational step for governments to take in a time where we don't have the coordination of fiscal stimulus.

The United States is spending a lot more money to stimulate its economy than most of our trading partners in the industrialized world. And to the extent that we're doing that, American taxpayers are going into debt in order to do that.

They're trying to stimulate the U.S. economy, not the global economy. They want to create good jobs at home in their own communities. They want their tax dollars spent that way. And other countries may not step up to the plate and do the appropriate level of fiscal stimulus, if they think they can free ride off of what the United States has done.

So I think it's an entirely rational and appropriate within the limits of our international obligations. So long as we are observing our international obligations, there's no reason for any other country to complain.

Limits of international law

Fred Bergsten
Peterson Institute
Sure, it's right to worry first about your own country and your own citizens, but, second, no, it's not right to try to restrict what you do to your own citizens.

JEFFREY BROWN: Well, so this is putting on the table a question a lot of people have. I mean, isn't it right for countries to worry first about their workers or their companies, especially when they're putting billions of dollars on the line in a stimulus plan like that? And can't it be done, as Thea lee is suggesting, within international trade law?

FRED BERGSTEN: Sure, it's right to worry first about your own country and your own citizens, but, second, no, it's not right to try to restrict what you do to your own citizens.

As, again, the president said -- and Thea agrees -- it's a global crisis. You need a global response. In fact, we all have to be thinking in terms of creating policies that stimulate the global economy. I totally agree with Thea on the need for coordinated stimulus measures around the world. Some countries have, in fact, stepped up.

Contrary to what Thea said, there's at least one big economic power whose stimulus package to date is much bigger than our own, relative to its economy. That's China, it may surprise you.

The Europeans, by contrast, are lagging, in some sense free-riding on the rest of the world. Germany, U.K., others have to raise their sights, have to get more ambitious. That's what this G-20 summit process is all about, to try to galvanize all the major countries to expand domestic demand in their economies by enough to galvanize a world recovery. But that's the way to go about it.

If, by contrast, countries try to restrict the payoff from their stimulus programs to their domestic workers and their domestic economies, as I said before, it will lead to instant retaliation. No country in this environment could permit a major trading partner to get away with that. If the Europeans do it or if China does it, I assure you, the United States will and should retaliate.

JEFFREY BROWN: OK, so instant retaliation and it doesn't work. That's what Fred Bergsten's saying.

THEA LEE: Well, the instant retaliation, first of all, is a little bit silly. I mean, to the extent -- if the United States is honoring its obligations under the WTO and NAFTA and so on, there's no reason why there would be retaliation.

We have negotiated flexibility in our international obligations. We should use that flexibility. Other countries already do. Other countries take full advantage of the exceptions that they negotiate at the WTO and other trade agreements.

Many countries, like China and India and Brazil, have made no obligations. They are not obligated to open their procurement markets to U.S. products. It actually would be silly for the United States to open its markets to countries that have declined to open their procurement markets to our own.

There's a reason why we negotiate these in a reciprocal basis, because countries tend to be reluctant to open their own markets unilaterally, their own procurement markets. We shouldn't give away what other countries are holding down.

Pressures of globalization

Fred Bergsten
Peterson Institute
We know that globalization in the aggregate is a big plus for the U.S. economy. We've studied it at my institute. We've shown the U.S. economy's $1 trillion a year richer as a result of the globalization of the last 50 years.

JEFFREY BROWN: Let me ask you both -- a lot of people ask me about and I hear it at conferences and all, but there's a bigger picture issue here. Is the trade issue connected to a kind of deeper crisis of confidence that millions of people in the United States and around the globe, feeling that the system was -- of globalization, that we've been hearing about for decades, was supposed to work and now wondering if it works, in fact?

Is that what's driving some of this political pressure on trade issues and other factors that governments have to respond to? Do you see that?

FRED BERGSTEN: Sure, absolutely. One of the backdrops for this current debate is a backlash against globalization that has been building in this country for 10 to 15 years. A lot of people blame globalization for worsening income distribution, job insecurity, all the ills that we know have been prevalent in our economy.

Now, all studies show that globalization is only a modest cause of those problems but is a proxy for them. And U.S. policy has failed in a major respect. We know that globalization in the aggregate is a big plus for the U.S. economy. We've studied it at my institute. We've shown the U.S. economy's $1 trillion a year richer as a result of the globalization of the last 50 years.

But there are adjustment costs, like any dynamic economic change. There are losers. There are costs. There are downsides. We quantify it as about $50 billion a year, a 20-1 benefit-to-cost ratio, nevertheless, significant costs.

You have to take care of that downsides cost loser problem. You have to have social safety nets that deal with those problems. The U.S. has done a very poor job.

You lose your health care when you lose your job. Unemployment insurance is miserably inadequate. Trade adjustment assistance works, but it doesn't even cover services workers who get outsourced, and it's inadequate.

So one thing the Obama administration I think promises to do is to significantly shore up those safety nets. The stimulus package already began to do it in some respects. But we must deal with the downsides costs and losers if we're going to deal with that underlying problem and provide then a foundation for a sensible open trade policy.

Globalization hurt workers, trade

Thea Lee
AFL-CIO
And so we've had the wrong kind of globalization. It's been a corporate-dominated globalization, which has not really served working people here or in our trading partners very well.

JEFFREY BROWN: All right. And a last word here. I mean, the downside is what is exaggerated at a time like this, clearly, right?

THEA LEE: It's not quite as simple as Fred makes it out to be. I mean, there's a tremendous distributional impact of the kind of trade and globalization policies that we've put in place, that globalization has been used by American corporations to bargain down workers' benefits and wages and to bust unions, and, you know, they've done that not just in the United States, but around the world.

And so we've had the wrong kind of globalization. It's been a corporate-dominated globalization, which has not really served working people here or in our trading partners very well.

And so the impact has been that we've seen this long-term -- decades-long stagnation of wages and growth of wage inequality in the United States even as we've been in a period of tremendous economic growth, productivity growth, technological improvements, and increase in globalization.

So to the extent that the benefits haven't gotten down to the average worker, to the typical worker, of course there's going to be a backlash against globalization and of course we need to do our trade policy differently, not just throw a few crumbs to the losers.

JEFFREY BROWN: All right. We will leave it there with a lot of big questions out there. Thea Lee and Fred Bergsten, thank you very much.

FRED BERGSTEN: Good to talk.