Told you so...
Matthew Rick
Issue date: 4/6/09 Section: Money/Health
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In one of my recent columns (Buy American? February 23), I discussed the negative impacts the United States' "Buy American" provision and other protectionist measures it would create. Unfortunately, my prediction was correct - trade is taking a dive, and many countries are enforcing protectionist trade policies.
For example, on March 11 the Omnibus Appropriations Bill was signed into law by the president. This bill eliminated a program that allowed Mexican truckers to carry cargo into the United States. The program lowered costs, since cargo would have otherwise needed to be unloaded from Mexican trucks, then loaded onto trucks just to bring it across the border, and then again unloaded once across the border and finally loaded onto an American truck. Let me remind you that this applies even if it was only traveling a few miles across the border.
Only a week later, on March 18, Mexico retaliated with tariffs as high as 45 percent on some 90 carefully selected agricultural and industrial imports from America. I specifically state that this is a retaliation because it does little to help Mexico. It attempts to purposely affect important exports from many American states. Under NAFTA, Mexico has the right to impose higher tariffs to a certain extent, so there isn't much that can be done to stop this.
What I find to be one of the more horrendous parts of this whole ordeal, though, is the excuses that are made to defend America's actions. Supposedly it is because Mexican truck drivers are unsafe and poorly trained. This is actually an outright lie by Congress and the trucking unions that support the effort.
America's own Department of Transportation provides evidence against this allegation. They collected data back when the program first started and found that Mexican trucks operating in America actually incurred far fewer safety violations than American truckers. That's quite a contradiction, and evidently this sham was only a meager attempt by a powerful union to save a handful of American jobs - though it will likely create further net job losses and promote inefficiencies.
Unfortunately, this is not the only occurrence of events like this, and many other countries complain of similar protectionist measures around the world. The world's largest economies renounced protectionist policies recently during the G20 summit in London - though the majority of these countries have already enacted protectionist policies within the last few months. Not only is it rude to lie to us on World-wide television, it's awfully counterproductive.
Just how counterproductive and destructive will these protectionist policies actually be, though?
Well, we can look back to the Great Depression to give us a slight idea. During the time of the Great Depression, world trade was a fraction of what it is now. As many know, protectionist policies enforced back then only helped in pulling us into a longer and deeper depression.
Nowadays, trade is not only much larger than it was then, but supply chains are also far more integrated. These "global supply chains" have numerous components that many times only specialize in one element of a product's final production. This poses quite a problem because many of the members of these "global supply chains" are from different countries. So when trade barriers like the tariffs imposed in Mexico are created, the cost of these inputs will be higher. Can you guess who these higher costs get dumped on? You!
Part of the reason for our current recession is a lack of demand. That's why the government wants to pump a ton of money into the economy - so we buy (demand) more stuff. This is a fantastic action plan, but the only problem is that higher prices from protectionist policies will undoubtedly cause consumers to demand less (remember in economics class where that demand curve was downward sloping?). Indirectly increasing the price of goods by enforcing protectionist policies is certainly not the way to fix our current problem. In addition, trade barriers like this will only work to break down the current "global supply chains" that have been created. This is just another reason why protectionist policies are counterproductive because once demand rebounds (and it certainly will), our economies will recover and grow faster if these "global supply chains" stay intact.
Rick is a senior business economics major and columnist for The Spectator. This column appears bimonthly in the Money section.
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