I’m setting the protectionist threat level to safety orange

When the Obama administraton announced the decision to slap a 35% tariff on Chinese tire imports, I was pretty sure that free traders would be incensed.  And I haven’t been disappointed — even the financial markets are freaking out over this one. 

We trade enthusiasts are an excitable lot, however, what with everything leading to the falling off of cliffs, crossroads being reached, and red zones being breached.  Seven years ago, the allegedly free-trade Bush administration imposed steel tariffs that were found to be WTO-inconsistent.  There was a lot of gnashing of teeth and wailing at the time about the end of the open economy as we knew it — yet the world trade system proved to be pretty robust.  So maybe my trade compatriots are exaggerating things a wee bit, yes?  In all likelihood, won’t this be resolved via the WTO dispute settlement mechanism about 18 months from now?

For the first eight months of the Obama administration, I’ve been resisting the urge to shout “protectionism” at the drop of the hat.  This time, however, there are four reasons why I’m feeling much more nervous: 

1)  This isn’t your garden-variety protectionism.  Last month, Chad Bown explained the Financial Times why this decision was a very special kind of protectionism: 

[A] little-known loophole in the rules governing China’s 2001 WTO accession makes it easy for a global protectionist response to spread faster and further than that which took hold in 2002. Nowadays, once any one country imposes a China safeguard on imports, all other WTO members can immediately follow suit, without investigating whether their own industries have been injured.

So this trade dispute can metastasize more quickly than most. 

2)  Beijing is not lying down on this.  China’s furious and swift reaction points to another problem:  the United States is not the only country feeling protectionist urges at the moment.  Economic nationalism in China is riding quite high at the moment, as Keith Bradsher suggests in the New York Times: 

The Chinese government’s strong countermove followed a weekend of nationalistic vitriol against the United States on Chinese Web sites in response to the tire tariff. “The U.S. is shameless!” said one posting, while another called on the Chinese government to sell all of its huge holdings of Treasury bonds….

China had initially issued a fairly formulaic criticism of the tire dispute Saturday. But rising nationalism in China is making it harder for Chinese officials to gloss over American criticism.

“All kinds of policymaking, not just trade policy, is increasingly reactive to Internet opinion,” said Victor Shih, a Northwestern University specialist in economic policy formulation.

Methinks Shih and Bradsher are exaggerating things a wee bit — imagine for a moment if U.S. foreign policy was driven by people getting upset on the Internet — but you get the point.   

The U.S. use of this provision is doubly troubling, because from Beijing’s perspective their WTO accession negotiations were seen as a humiliating kowtow to the power of the West.  China is not going to be selling its bonds anytime soon, but Beijing has not quite mastered how to cope with these kinds of domestic pressures, so they could do something really, really stupid.

3)  Politically, Obama has boxed himself in.  As egregious as the Bush steel tariffs were, they were targeted at a sector and not a country.  Furthermore, the Bush administration responded to the hubbub very quickly by watering down the worst effect of the tariffs. 

The Obama administration’s new tariff is expressly directed at China.  And I’m not saying that China is blameless here.  But because it’s country-specific, the administration has less room to maneuver — either the tariffs are applied against China or they aren’t.  It can’t walk this back without it looking like a flip-flop.  Which means that there’s little room for concession or negotiation. 

4)  Obama’s base scares me on trade.  When the Bush administration did what it did, it was fulfilling a campaign promise to the state of West Virginia steelwokers.  Fortunately, the rest of Bush’s winning political coalition was not seeking trade relief.  So the protectionist instinct pretty much ended with the steel tariffs — and everyone in the Bush administration knew that they’d be overturned by the WTO eventually. 

With the Obama administration, however, this feels like the tip of the iceberg.  Most of Obama’s core constituencies want greater levels of trade protection for one reason (improving labor standards) or another (protecting union jobs).  This isn’t going to stop.  “Trade enforcement” has been part and parcel of Obama’s trade rhetoric since the campaign.  The idea that better trade enforcement will correct the trade deficit, however, is pure fantasy.  It belongs in the Department of Hoary Political Promises, like, “We’ll balance the budget by cracking down on tax cheats!” or “By cutting taxes I can raise government revenues!”  It.  Can’t.  Happen. 

If I knew this was where the Obama administration would stop with this sort of nonsense, I’d feel a bit queasy but chalk it up to routine trade politics.  When I look at Obama’s base, however, quasiness starts turning into true nausea. 

Developing…. in a very, very scary way. 

UPDATE:  More from Brad DeLong, Dave Schuler, and Shadow Government’s Phil Levy.