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Crisis could lead to creeping US protectionism – analysis

  The world economic crisis has increased chances the United States will erect new barriers to trade but broad tariff increases, like those often blamed for causing the Great Depression, are unlikely, analysts said.

President-elect Barack Obama’s criticism of China’s currency practices, the North American Free Trade Agreement and other trade deals have raised concern his inauguration on Tuesday could usher in an era of US protectionism.

“I think President Obama is going to talk more about getting tough on trade than actually doing anything because I think he and his economic advisers realize it would be bad for the US economy to raise costs for US consumers and jeopardize US exports abroad,” said Dan Griswold, head of the free market Cato Institute’s trade policy shop.

The US recession increases the temptation for politicians to shut out imports as unemployment rises. Last year, the United States lost more jobs than in any year since 1945, at the end of World War Two. That could lead to protectionism in a number of guises, even if the United States steers clears of anything like the 1930 Smoot-Hawley Tariff Act that prompted a series of retaliatory tariff hikes around the world.

One of the worst things lawmakers could do is to include highly restrictive “Buy American” provisions in a proposed $825 billion economic stimulus package now taking shape in Congress, Griswold said. Lawmakers from steel-making states introduced legislation on Thursday that would require the Departments of Defense, Homeland Security and Transportation to buy US steel in any construction jobs they execute.

Senior Democrats on the House of Representatives Ways and Means Committee also introduced a bill on Thursday to give the incoming Obama administration new tools to ensure that other countries play by the rules. But “enforcement” can easily become protectionism if the executive branch is allowed too much discretion to decide other countries are pursuing unfair trade practices that warrant US import curbs, said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics.

MORE ANTIDUMPING CASES

Typical of when the economy slips into recession, US industries, like steel, are expected to flood the incoming Obama administration with requests for anti-dumping and countervailing duties on imported goods.

US law makes it relatively easy to persuade the US International Trade Commission, an independent quasi-judicial body, to set preliminary duties that have a chilling effect on trade even if it ultimately decides that a domestic industry is not being badly damaged by imports, Hufbauer said.

Likely US action this year to address climate change or to protect consumers from “unsafe” foreign products provide other opportunities for both Congress and the Obama administration to slip in trade-restricting measures under the cloak of higher-sounding objectives, Hufbauer said.

Some members of Congress may push for broader import curbs. But it is hard to argue that would help the US economy since imports are already falling sharply and new curbs could lead to retaliatory actions against US exports, said Ed Gresser, trade director at the Progressive Policy Institute.

There is no sign that key lawmakers like Senate Finance Committee Chairman Max Baucus, a Montana Democrat, or House Ways and Means Committee Chairman Charles Rangel, a New York Democrat, want massive tariff hikes or favor restrictive quotas on imports, Gresser said.

WILL CHINA TRIGGER RESPONSE?

A bigger concern is whether China, whose exports have plummeted, will take action like devaluing its currency to prop up exports, triggering protectionist responses around the world, said Greg Mastel, a senior policy adviser at Akin Gump. “I think that’s a much more realistic fear than the US moving unilaterally toward trade protectionism,” Mastel said.

Obama is likely initially to take a go-slow approach to new trade liberalizing agreements combined with more aggressive enforcement of existing pacts, he said. Meanwhile, Congress appears to be on the verge of passing a major expansion of federal retraining and unemployment assistance to help workers who have lost their jobs because of imports or jobs moving overseas.

An improved US safety net would ease, if not eliminate, pressures for protectionism, both Mastel and Gresser said. Still, Obama will face major tests early on.

Many US lawmakers believe China’s currency is already significantly undervalued and want Obama to formally label Beijing as a “currency manipulator” in a semi-annual Treasury report due out in April. If he does, many in Congress will see that as a green light to pursue bills -- such as one co-sponsored last year by Obama -- that would treat currency manipulation as a subsidy under US countervailing duty law.

Obama will also meet in April with other leaders of the Group of 20 nations to discuss world economic woes.

When President George W. Bush hosted the G20 meeting in Washington in November, leaders agreed to refrain for 12 months from raising new trade or investment barriers or adopting World Trade Organization-illegal measures to stimulate exports. Obama should push for language to strengthen that pledge, which already shows signs of fraying, and to set up a monitoring program, Hufbauer said.(Reuters)