We Need Protectionism, Now.

I wanted to get a ball rolling that I’m going to stick with for a few days and will eventually get into some pretty deep analysis, but for right now, I just want to talk a little about why protectionism must not be a bad word in America, as it has come to be seen.

There are myriad reasons that people don’t like the idea of protectionism; the greatest of which is that academics tend to be free traders, and those of us with university training in economics learned from those academics.  They told us that free trade increases everyone’s standard of living, brings world peace, creates jobs, encourages innovation, lets nations focus on those things it does best.  They also told us there is no free lunch; they just never bothered to tell us the cost of free trade.

Ronald Reagan understood the dichotomy between free trade and fair trade.  You can’t ask a nation of laws to compete with nations that are lawless.  You can’t ask Western workers to compete with slave wages.  You can’t ask businesses in the West to deal with regulations ranging from workers rights to environmental protection against nations that couldn’t care less about the plight of the average man or the quality of his drinking water.  Between England and America you can have fair trade, between the West and China, you cannot.

When America’s auto industry, and its millions of workers, came under threat from cheap Japanese imports, Reagan didn’t tell the American worker to try harder, he used the power of the Federal government to force Japan to build cars in America and create jobs here, or pay stiff tariffs to even the playing field.  Reagan’s elegant solution didn’t destroy the auto market in the U. S., and it didn’t destroy the Japanese auto makers; it created jobs in America, still forced the American auto makers to compete on quality, and maintained choice in the market for consumers.

Clinton, Bush, and Obama did not and have not sought to protect the American market, its workers, and its consumers in the same way.  Obama’s answer to 10% unemployment, millions of jobs lost to Asia, and an unconscionable trade imbalance with communist currency manipulators?  He tells Americans to seek training in new fields.  Can China not produce a windmill?  Can China not engage in genetic research?  What are the newly trained Americans to do in another decade when their new jobs are being sent overseas as their old ones were?  Retrain, again?  How many times can a worker retrain in his or her working life?

Most of America’s economic problems could be solved by simply protecting the American market:  If companies want to sell here, then they should produce here.  That’s what China requires; and further, they’ll require you to engage in a joint venture with a Chinese firm if you want to produce there (and, of course, the venture partner will adopt the foreign technology, and then the foreigners will be kicked out).  If they foreigners don’t want to produce here, then they can pay a tariff on the goods they send to this country.  China sends $337 billion dollars a year worth of products to the United States; a 10% tariff on those goods would cover the Earned Income Tax Credit, or the Pell Grant system.  A 50% and we could knock a trillion dollars off of the Federal deficit over the next ten years.

Yes, the price of goods would go up.  That would make American-made goods more attractive to American consumers (still the largest consumer market on the planet); which would make production in the U. S. more attractive, creating jobs, increasing wages, and offsetting the increase in prices with real increases in wages, which this nation hasn’t seen since 1973.

Perhaps there would be a trade war, but probably not.  There was no trade war with Japan in the 80s.  Reagan gave them the choice between producing in Japan and paying the tariff, or producing here and not paying the tariff — they chose to produce here.  But they didn’t go to the mattresses over the issue, because they needed the American market, and so does everyone else.

Other nations can ill-afford to engage in a prolonged trade war with America, right now.  In a decade or two, that may not be the case.  When enough Western jobs have gone to China, and the Chinese middle class is big enough, then the balance of power will have shifted.  They will no longer need our markets, and will rely on their own massive middle class to buy Chinese made products.  The time to act is now, while we still have the power to do so.

Right now, the $300 billion in products that China sends to the U. S. accounts for close to 8% of China’s GDP.  The $80 billion in goods we sell to china accounts for less than 1% of our GDP.  An all out trade war between China and America means that China goes into an instant recession, while America still grows.

There is nothing to fear from higher prices, and there’s nothing to fear from a trade war; why shouldn’t the United States (and the rest of the West, for that matter), use its position of strength to protect its market, create jobs, and force China to engage in fair trade?  Aside from the pressure applied by corporate lobbyists who like being able to take advantage of cheap Chinese labor, I couldn’t tell you why not.