The Washington Post is reporting that the US Stimulus Plan may represent an opening volley in "the first trade war of the global economic crisis":
Ordered by Congress to "buy American" when spending money from the $787 billion stimulus package, the town of Peru, Ind., stunned its Canadian supplier by rejecting sewage pumps made outside of Toronto. After a Navy official spotted Canadian pipe fittings in a construction project at Camp Pendleton, Calif., they were hauled out of the ground and replaced with American versions.
In recent weeks, other Canadian manufacturers doing business with U.S. state and local governments say they have been besieged with requests to sign affidavits pledging that they will only supply materials made in the USA.
Canadian voices are already calling for retaliation:
Outrage spread in Canada, with the Toronto Star last week bemoaning "a plague of protectionist measures in the U.S." and Canadian companies openly fretting about having to shift jobs to the United States to meet made-in-the-USA requirements. This week, the Canadians fired back. A number of Ontario towns, with a collective population of nearly 500,000, retaliated with measures effectively barring U.S. companies from their municipal contracts - the first shot in a larger campaign that could shut U.S. companies out of billions of dollars worth of Canadian projects.
Everyone loses a tit-for-tat trade war. It's become drearily fashionable to compare today's economic crisis to the Great Depression, but it's hard to study that earlier phenomenon and not conclude that it was specifically rampant protectionism (coupled with a lack of Keynesian stimulus) that turned the crisis into a depression.
Free trade as such isn't the problem. Trade demonstrably increases overall wealth, as long as it isn't force-mapped into a simplistic Rickardian comparative advantage model. The main problems, as I see it, are:
"Free trade" agreements are not actually free trade agreements at all (which would be limited more or less to prohibiting tariff and non-tariff barriers to foreign imports) but are actually free investment agreements that limit a country's ability to ensure that foreign investment goes into fixed capital rather than, say, destructive currency speculation.
The agreements are coupled with dogmatic neoliberal constraints on the ability of governments to set and enforce environmental and labour standards for manufactured goods moving across borders. This is purely ideological and not intrinsic to the concept of free trade.
An agreement could just as easily commit all parties to a "race to the top" that would eliminate much of the false comparative advantage of low-wage, low-regulation maquiladoras which, among other things, merely displace the point source of pollution without internalizing the global cost of that pollution.
Through a variety of means, the US has ensured that its own industrial policy is insulated from free trade rules. In addition to such tactics as stalling endlessly on actual NAFTA violations until a friendly Canadian government caves (e.g. softwood lumber) and in moving protectionist measures to lower levels of government that are not subject to NAFTA rules, the USA also hides enormous public involvement in its domestic R&D/manufacturing under the rubric of "national defense", which is exempted from trade rules.
An escalating trade war will leave everyone worse off and could actually slow or stall the shaky nascent recovery in the global economy.
Instead, we should be trying to muster the political will to negotiate a 21st century NAFTA that steers all three countries toward rising standards rather than an ongoing opportunistic race to the bottom.
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