The Evolution of Protectionism
If your business is involved in the global marketplace, there's rarely been a time so fraught with potential disaster as right now. A confluence of factors has combined to create a perfect storm that threatens to make it more difficult and more costly to move goods across borders. In essence, we're seeing the evolution of protectionism beyond its traditional meaning to encompass a whole range of new threats.
Protectionism is of course a loaded word that carries a connotation of xenophobia or nationalism--an "us against them" mentality. Historically, it's usually referred to the practice of erecting barriers to foreign goods or investment to promote domestic industry. Economists don't like it because it can short-circuit the free market system, foster inefficiency and drive up prices.
This strain of protectionism has always been around and always will be. A case in point is the "buy American" provision included in the economic stimulus bill, which requires any iron or steel used in the construction projects funded by that legislation to be purchased in the U.S. Those industries have been among the most ardent in seeking to stave off imports over the years, and they've never lacked for political backers. That support has only grown with an economy in free-fall and a new team in the White House that thinks it has a mandate for immediate and far-reaching change. Trade policy will be a much bigger part of the effort to revitalize the economy than most people realize, and it'll be strongly influenced by an energized and emboldened group of lawmakers and administration officials convinced that a healthy dose of enforcement will go a long way toward curing our economic ills.
That said, economic globalization has become all but irreversible, and strictly economic protectionism is relatively limited when it's pursued. Business costs have fallen, consumer choice has increased, and even in times of dire economic stress, no one seriously talks about walling off the country from the rest of the world. Instead, today the concept of protectionism is evolving to focus on things that could harm us, whether individually or collectively. From poultry that could spark a bird flu pandemic to ballast water in cargo ships that harbors invasive species (as happened with the zebra and quagga mussels, invasive aquatic creatures that hitchhiked from Eastern Europe to the U.S.'s Great Lakes via ballast water), an increasingly informed public is becoming more and more worried about the non-economic effects of cross-border trade.
The result has been a concerted effort to push out U.S. borders and keep potential threats as far from the homeland as possible. This concept initially focused on weapons of mass destruction and still does to some extent, as evidenced by the so-called "10 plus 2" rule we discussed in December's column . It's an importer security filing rule that requires companies importing goods into the U.S. and ship lines carrying those products to provide customs with a range of additional cargo and shipment information. But this policy has been expanded significantly in recent years, and the Consumer Product Safety Improvement Act that Congress passed in 2008 is a good example. Reports of lead-tainted toys quickly erupted into a full-fledged public outcry, and in virtually no time lawmakers had pushed through a sweeping new law that unleashed a regulatory avalanche that threatens to bury U.S. businesses. This year we could see the process repeated with respect to imported foods and drugs; already a broad overhaul bill has been introduced in the House, and with the peanut scare continuing to dominate news headlines, congressional action is all but assured.
But protectionism is continuing to evolve, and already we've seen what its next stage could look like. Last year Congress amended the Lacey Act, a century-old law aimed at protecting endangered species, in an effort to curtail illegal logging abroad. What is particularly notable is that it wasn't just the environmentalists pushing for the bill--it was also the American paper industry, which was concerned about cheap foreign paper being dumped in the U.S. market. Suddenly, what had been just an environmental issue was also a trade remedy issue, which tends to get much more visibility and traction. And with the economy continuing its downward spiral, it wasn't hard to sell.
In today's world, traditional trade barriers like tariffs and quotas have been severely weakened after decades of liberalization and countries are limited in the types of other restrictions they can impose. But there are loopholes, and companies seeking protection from foreign competition are moving quickly to exploit them. For example, World Trade Organization rules allow countries to impose trade barriers for moral, public health and safety, environmental protection and other reasons, and more and more such measures are cropping up. Not only do they have political cover, they are also apt to find broader public support. The U.S. textile industry did this 20 years ago by drawing attention to sweatshop labor conditions abroad, and today domestic manufacturers are highlighting environmental concerns like carbon footprints and greenhouse gas emissions.
Certainly governments can't ignore that global competition can displace workers and injure industries. Those are legitimate concerns and it's vital to have laws and policies in place to address them. That's why I'm heartened to see Congress moving to extend the Trade Adjustment Assistance program and expand its coverage. The TAA financially helps manufacturers affected by import competition.
At the same time, trade policy and public policy are becoming increasingly intertwined. There are a lot of valid social, environmental and other such concerns out there, but as we've seen in the case of the CPSIA and the Lacey Act amendments, trade policy can sometimes be a blunt instrument where one with more precision is required. It will be especially important in the weeks and months ahead to ensure that any solution we come up with isn't more harmful than the problem.