Obama's Economic Vandalism: Trade Protectionism

It hard to know whether Obama's policies of trade protectionism result from his ignorance of both economics and history or simply putting politics ahead of both. Take your pick. Either way, he has become the first protectionist president since Herbert Hoover.

The Smoot-Hawley tariff, passed in 1930 by Hoover, was a catastrophe. It ignited retaliation from other countries, resulting in a collapse of world trade, thus deepening and extending the Great Depression. Except for Obama, U.S. presidents of both parties learned from this. Even democrat Bill Clinton supported NAFTA (North American Free Trade Agreement) and ratification of the World Trade Organization and most-favored nation trading status for China. Critics of globalization—and NAFTA in particular—complain about a loss of manufacturing jobs to Mexico and other detrimental effects to the U.S., but the facts tell otherwise. Michael Boskin, economics professor at Stanford University and former chairman of the Council of Economic Advisors, compares the results of NAFTA to the comparable period before its passage: “U.S. manufacturing output grew more rapidly and reached an all-time high [in 2007]; the average unemployment rate declined as employment grew 24%; real hourly compensation in the business sector grew twice as fast as before; agricultural exports destined for Canada and Mexico have grown substantially and trade among the three nations has tripled; Mexican wages have risen each year since the peso crisis of 1994”, the year NAFTA was passed.

When Franklin Roosevelt's secretary of state Cordell Hull recognized the damage of Smoot-Hawley, he engineered bilateral trade agreements to try to restore free trade. Since then, with a few setbacks, the U.S. has been the world leader in free trade. After World War II, the U.S. was the prime mover in the GATT (general agreement on trade and tariff) negotiations to improve international trade. By opening up U.S. markets to foreign countries, the explosion in trade created a boon for U.S. consumers and opened up what had been largely closed economies—especially India and China—to exports from the U.S. Sure, some jobs have been lost, but millions more new jobs were created. The U.S. is the world's largest exporter. Since 1998, U.S. exports have grown by more than 94 percent. The best way to create jobs in the U.S. is to sell to the 95 percent of the world's population that lives outside our borders. Conversely, erecting barriers to trade invites retaliation from other countries, diminishing both our export opportunities and the benefits U.S. consumers enjoy from imports. On balance, we are far better off with freer international trade, as are other countries. It's a win-win situation.

There are 57 million Americans working for companies that benefit from exports. One in five factory jobs depend on exports, and one in three acres on American farms produce for export.

Enter Obama. He has now slapped a 35 percent tariff on Chinese tires. China immediately retaliated with tariffs against U.S. chickens and auto parts. He has also introduced a “Buy America” program. Does he not know that Herbert Hoover also introduced a “Buy America” program?

Has Obama also learned nothing from his own experience with Mexico earlier this year? In violation of NAFTA, the Obama administration in March 2009 closed the U.S. border to Mexican trucks except those with existing permits on the grounds they are “unsafe.” Under NAFTA, Mexican trucks were to be allowed to deliver to border states starting in 1995 and anywhere in U.S. five years later. But in 1995, as a sop to the Teamsters Union, President Bill Clinton nixed the opening to Mexican trucks, claiming safety concerns. A NAFTA panel ruled unanimously in Mexico's favor. Nevertheless, Congress for years refused to authorize the Department of Transportation to grant long-haul operations authority to Mexican trucks because of “safety” considerations. A 2007 study by the DOT found Mexican trucks to be safer than U.S. trucks. A pilot program comparing Mexican and American trucks was then initiated under the Bush administration to settle the safety issue. Inspections of randomly stopped vehicles making 45,000 trips across the border found the Mexican truckers far safer than U.S. counterparts. During the 18 month program, the U.S. carriers' rate of failure to comply with all safety regulations was 21.6%; for Mexican carriers in the pilot program, the rate was 7.3%.

When Obama closed the border to Mexican trucking, Mexico—after years of restraint and good will—quickly retaliated with a list of 90 U.S products that will face new tariffs of 10% to 45%, which will affect $2.4 billion in goods across 40 states. Mexico is the second largest buyer of U.S. exports.

California, which supplies fruits and nuts to Mexico, will be hit hard. Table grapes will face a 45% duty; wine, almonds, juices and other agricultural products will pay 20%.

Over 90% of California's Christmas-tree exports and 65% of Oregon's go to Mexico and will face a 20% tariff. Four out of ten pears the U.S. exports go to Mexico, and half of those are from Washington. They will face a 20% tariff, as will the paper products from the Pacific Northwest and Wisconsin and the $128 million of scrap batteries that Wisconsin exports to Mexico.

President Obama's home state of Illinois annually exports $57 million of plastic tableware and kitchenware to Mexico and $68.7 million in printed leaflets and brochures, which will now pay a 20% tariff.

North Dakota Senator Byron Dorgan sponsored the amendment to close the border by killing the pilot program. His state exports 80% of its oil seeds to Mexico, where they will now face a 15% tariff. (He is quoted in the Wall Street Journal March 17, 2009 as saying, “I have said all along that I have no problem with Mexican long-haul trucks being allowed into the United States if it can be done safely.” He lies! He lies!)

Some 75% of U.S.-Mexican trade moves by truck. Efficiency would be greatly enhanced by eliminating the process of unloading one set of trucks at the border and reloading another. One carrier in the pilot program reported saving over $600,000 in one year from cutting trip times and fuel costs.

Instead of greater efficiency from allowing Mexican trucks in the U.S., the U.S. will be facing a shrinking market for its products—and loss of American jobs—as Mexicans turn to alternative products from Europe, Canada and Latin America. The U.S. will suffer further because more than 800 Mexican carriers are majority owned by U.S. citizens, whose reduced income will also mean the U.S. government will receive less in taxes. It's a lose-lose-lose situation.

The 35% tax Obama has placed on the importing of Chinese tires will not save or create jobs in the U.S. These are the low-end tires that American companies no longer even manufacture in this country. The U.S. companies make the high-end tires—where they can earn higher profits and afford to pay higher wages. None of the ten domestic tire manufactures in the U.S. sought the protectionism Obama has dealt. Seven of these make tires in other countries, and four of them make low-end tires in China. Obama imposed the tariff on Chinese tires at the request of the United Steelworkers union.

Here's an example of the inefficiencies created by protectionism resulting from a trade spat way back in the early 1960s. Europe put a high tariff on imported chickens, to protect local chicken producers. President Lyndon Johnson retaliated with a protectionist measure to favor U.S. automobile companies and the United Auto Workers by imposing a 25% tax on imported trucks and commercial vans. Fast forward now 46 years, when American auto companies have manufacturing plants abroad, and they have to pay the import tax to bring their trucks and vans into the U.S. Customs officials determine whether a vehicle qualifies for the tariff by various features that might indicate whether a vehicle's primary purpose is to transport people or cargo. Cargo does not require rear seats, seatbelts or windows. So Ford now makes its Transit Connect model in Turkey with windows, rear seats and seatbelts. When these vehicle reach the U.S., the unneeded seats and windows are removed. The fabric is shredded, and the glass and steel are recycled. This costs Ford hundreds of dollars per vehicle, but the import tax drops from 25% to 2.5%, saving thousands. That's the kind of “progress” (a.k.a. inefficiency) that protectionism creates.

Having learned nothing from the experience of the 1930s and 80 years of our experience with free trade measures such as bilateral trade agreements, Obama campaigned for the presidency by promising trade protectionism. He promised to block ratification of free trade agreements with South Korea, Columbia and Panama, which had been negotiated during the Bush administration. Never mind that he has spoken in favor of free trade, for example, at a G-20 meeting last April when he joined other leaders in a commitment to avoid protectionist measures. He lies! He lies!

The U.S.-Columbia Free Trade Agreement was signed almost three years ago (November 2006), but the Democrat-controlled Congress and President Obama have been stalling about bringing it into effect. As a result, American businesses have been paying $1.9 million per day from tariffs on their exports to Columbia. Meanwhile, Canada has completed free-trade negotiation with Columbia and submitted it for approval by the House of Commons. The European Union has also negotiated free trade agreements with Columbia and Korea. So U.S. exporters will be at a competitive disadvantage and face a loss of sales in those markets.

I'm sure Obama doesn't think his protectionism will ignite a trade war. But that's what Hoover thought, too. A study buy Tom Donohue concludes that the “buy American” provisions of the stimulus bill and the refusal to permit cross-border trucking with Mexico place a half million U.S. jobs at risk.