The Independent Market Observer

9/28/12 – Congressmen Smoot and Hawley, Please Call Your Offices

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 28, 2012 11:23:38 AM

and tagged Yesterday's News

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I have written a couple of times about rising protectionism, and looking at today’s stories, now seems to be an excellent time to revisit the topic. Protectionism is just one facet of how states try to wring out economic advantage over others, with currency and trade policies among the available tools. Today we have several examples.

On the currency policy front, we have “Beijing, Seoul Blast Fed Push” in the Wall Street Journal (WSJ) on page A13. The article talks about how both central banks are opposed to continued U.S. monetary easing, which encourages inflation around the world, weakens the dollar to make U.S. exports more competitive, and in general benefits the U.S. at the expense of its trading partners. Of course, this is exactly what the policy is designed to do. The ability of the U.S. to continue to follow policies that benefit itself at the expense of others, however, is dependent on the continuation of the dollar as the reserve currency, which is the other focus of the article, as both central banks advocate finding an alternative. Not an immediate concern, but a building long-term concern.

More traditional trade-related protectionism was also on display. The WSJ has “EU Takes Slap at Boeing” (p. B1), which charges that the U.S. is subsidizing Boeing. I should note that this is a long-term dispute; last year, the World Trade Organization (WTO) ruled that, in fact, the U.S. does subsidize Boeing, giving the EU some standing to seek penalties. The kicker is that the WTO also found that the EU subsidizes Airbus, a Boeing competitor, and now the two sides are squabbling over who is worse. Either way, not a victory for free trade or comparative advantage. The New York Times (NYT) also weighed in with a story about this on page B7.

From airplanes to tomatoes is a big step, but the story is the same. The NYT’s “Ammunition for a Trade War Between US and Mexico” (p. B1) talks about how the U.S. may end an agreement providing market access for Mexican tomatoes. This could, according to the article, lead to a trade war. Mexico is arguing that the Obama administration is ending the agreement to placate Florida, a swing state. Walmart and other chains are protesting, as the end result will be higher prices for consumers. One more example of how politics can sway economics.

The U.S. is actually in a fairly strong position in many of these disputes, as a relatively small part of the U.S. economy is dependent on exports. Small is not unimportant, though, and the costs of trade restrictions are inevitably borne mostly by consumers. The net result of rising protectionism is lower growth, which will be one more headwind we face going forward.

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