The protectionism humbug

Just as the call for patriotism is often the last refuge of scoundrels, so the charge of "rising protectionism" is often the last desperate cry of globalists who don’t understand that it is raw mercantilism that is turning their free trade dream into a nightmare.

Speaking initially of the turmoil of European finance in Monday’s Financial Times, columnist Gideon Rachman then turned to the broader global scene and became the latest to warn that: "With international politics drifting, there is now a clear danger that the world will belatedly slide into protectionism."

As proof of this he cited the recent call by normally free trader Mitt Romney for imposition of tariffs on Chinese imports if China does not allow substantial appreciation of its yuan, Brazil’s imposition of anti-dumping duties on imports of Chinese steel tubes, Brazilian President Dilma Rousseff’s statement that "in the case of the current international crisis our principal weapon is to expand and defend our internal market," and Switzerland’s intervention in capital markets last week to halt the dramatic rise of the franc.

Said Rachman, "if other countries follow the examples of Brazil and Switzerland, the principle of free movement of capital around the world — one of the underpinnings of globalization — will be weakened." This, he then warned , could turn into a 1930s scenario in which the rise of protectionism turned a financial crisis on Wall Street into the Great Depression.

Rachman is one of the best foreign-affairs analysts out there and one of my favorite columnists. But this repetition of the orthodox economic wisdom is deeply flawed. It leaves the impression that Romney and Brazil and Switzerland are proposing and/or doing evil things to poor old China in some hysterical praroxyism of nationalist protectionism with maybe a hint of racism thrown in. The presumption is that we live in a world of free trade and free financial markets that are now suddenly being sullied by irrational actions and recommendations of nationalist leaders seeking narrow and short term political gain.

But this is simply not the case or at least it is very far from the whole case. We do not live in a world of free trade and free financial markets. Rather we live in a world that is divided. It is half free trade and half mercantilist. China, the world’s second largest economy, strictly manages the its yuan to be dramatically under-valued versus the dollar. It also manages the types and conditions of both domestic and foreign investment and often makes access to its markets conditional on the transfer of technology, investment, and jobs. Because China’s yuan is not allowed to appreciate, capital flows to Brazil where the real is soaring and thereby making Brazilian production for both foreign and domestic markets uncompetitive. In effect, China is exporting unemployment to Brazil. Nor is China alone. Many others have also adopted the strategic, export led, neo-mercantilist growth strategies pioneered by Japan after World War II.

In these circumstances, is it really irrational and evilly protectionist for Brazil to try to counter that in some way? Is the protectionism here really that of Brazil or is it that of China? Or, in the case of Europe and Switzerland, is the protectionism that of Switzerland or is the problem that Germany’s chronic trade surpluses and refusal to allow a European financial transfer mechanism make it impossible for the rest of Europe to grow?

I was just in Switzerland last month. It cost me $130 for a twenty minute cab ride to the airport because of the extreme strength of the Swiss franc. Do conventional globalists really expect that Switzerland can benignly do nothing while the guts are wrenched out of its productive base as a result not of the natural workings of free markets but of the impact of the strategic policies and market interventions of other countries?

Rachman and others like him are certainly correct that we are living in a dangerous moment. But it is of the utmost importance to understand all the sources of the danger and to deal with them pragmatically and realistically rather than on the basis of outmoded theories and long-established conventional wisdom.