The perils of creeping protectionism

The Bush administration succeeded in Miami in creating a “lite” version of the Free Trade Area of the Americas. Despite what the Los Angeles Times thinks, that’s still better than nothing, and should be interpreted as a modest step towards liberalization. However, the Economist highlights the latest protectionist move by the Bush administration:

On November 18th, Grant Aldonas, under-secretary at the Department of Commerce, announced new import quotas on Chinese dressing gowns, knitwear and bras, capping their growth next year to just 7.5%. Mr Aldonas invoked a clause in China’s treaty of accession to the World Trade Organisation, which allows America to constrain import surges that threaten to disrupt domestic markets. The bra-buying public, benefiting from cheap Chinese imports, may not have noticed any market disruption. But America’s textile firms, suffering from plant closures and job losses, would disagree. Now, the Commerce Department has shown that it is willing to use every device at its disposal to ward off the menace of cheap dressing gowns…. The quotas announced on Tuesday were in themselves only a small creep forward for protectionism. They cover only a few products, although the limits they impose will pinch tightly: China’s exports of cotton bras to America, for example, grew by nearly 32% in the first nine months of this year, according to the American Manufacturing Trade Action Coalition. The symbolism of this protectionist gesture is probably of more consequence. It shows that America is willing to shield its textile workers from foreign competition even after the mesh of quotas that currently trammel the global textile industry is undone next year. This prospect alone is enough to weigh on the plans, expectations and share prices of Asia’s light manufacturers. The gesture is also weighing on fraught Sino-American trade relations. The day after the quotas were announced, China cancelled a trade mission to the United States to buy American cotton, wheat and soyabeans. It also seized the occasion to announce that it is considering retaliatory measures against America’s illegal steel tariffs.

The story also highlights a recent speech by Federal Reserve Chairman Alan Greenspan (sponsored in part by the Economist). The entire speech is worth reading — it’s about how increased financial globalization has permitted greater flexibility for the U.S. to run a large current account deficit. However, it ends with a cautionary note:

Should globalization be allowed to proceed and thereby create an ever more flexible international financial system, history suggests that current imbalances will be defused with little disruption. And if other currencies, such as the euro, emerge to share the dollar’s role as a global reserve currency, that process, too, is likely to be benign. I say this with one major caveat. Some clouds of emerging protectionism have become increasingly visible on today’s horizon. Over the years, protected interests have often endeavored to stop in its tracks the process of unsettling economic change. Pitted against the powerful forces of market competition, virtually all such efforts have failed. The costs of any new such protectionist initiatives, in the context of wide current account imbalances, could significantly erode the flexibility of the global economy. Consequently, it is imperative that creeping protectionism be thwarted and reversed. (emphasis added)

Compared to Greenspan’s usually tortured syntax, this amounts to a clear warning. Go back to the Economist story on why creeping protectionism could threaten the U.S. balance of payments:

Chinese exports of textiles may be surging. But of greater significance to America’s deficit are signs that European exports of capital may be starting to ebb. According to figures released on November 18th, foreigners poured just $4.2 billion (net) into American stocks, bonds and notes in September compared with over $50 billion the month before. America has not seen such a sharp turnaround in capital flows since the terrorist attacks of September 11th, 2001. The volte-face was most striking among European investors. Over the first eight months of this year, according to Morgan Stanley, Europeans made net purchases of American assets averaging around $28 billion per month. In September, they stopped buying and started selling, offloading a net $403m.

Developing… UPDATE: Brad DeLong — who also picked up on the Greenspan speech — has some intriguing gossip about the bureaucratic politics behind the textiles decision. Paul Blustein also has a good take on recent events in the Washington Post.