This quarter the Clinton administration played the “good cop/bad cop” game. US chief trade representative, Charlene Barshefsky, was the bad cop, menacing Japanese steel producers with threats of punitive measures for “dumping”. Robert Rubin played good cop, publicly denouncing protectionism as a culprit of inflation, higher interest rates, and a lower standard of living. (Rubin must have gotten this from Alan Greenspan, because I can’t believe he’d espouse this wisdom on his own.) Of course, the media made much of Rubin’s public clash with Barshefsky. But, just a few days later (good soldier that he is), Rubin went on record to say he had no disagreement with Barshefsky, and that the whole Clinton administration was one big happy unified family. He proceeded to refuse further comment on the whole steel dumping issue.

“DUMPING”

Dumping is defined as selling product below cost and is promoted as devilish trickery by foreign competition. The whole concept is nonsense, created by ivory-tower economists and wielded by pressure groups formed to attack foreign competitors. The loopholes in GATT “anti-dumping” provisions are large enough to drive a truck though. Virtually any influential group can use it to erect global trade barriers.

Selling product below cost is a component of basic retailing strategy used to build market share or move overstocked inventory. It is done regularly in the United States in a variety of industries. Amazon.com loses money on every order it fills. Ever been to a “going out of business” sale? Saks Fifth Avenue occasionally sells clothing at regular retail prices in New York City but “dumps” merchandise in Florida. As a consumer, I have no problem with this. (As a matter of fact, I would love Sony to “dump” some big-screen televisions in time for my birthday.) But if NY and FL were two GATT countries, Florida’s retailers could retaliate. We’re in a global economy now; get used to the idea of foreign companies occasionally selling products below cost.

FERRETING OUT PROTECTIONISM

First of all, very few protectionists come out and say that they’re against free trade. So it is important to listen carefully. When you hear words like “fair trade” or when trade is blended with tangential issues (like the environment or labor) take note. Protectionism can result from a number of policies, the most obvious of which are tariffs. Less obvious forms of protectionism (employing GATT loopholes) are quotas, licensing requirements, unreasonably strict product codes, and even customs service corruption. But the most stealthy form of protectionism lies in any type of currency manipulation.

CURRENCY MANIPULATION

Through currency devaluation, for instance, governments try to “boost” their exporters by cheapening their currency. Though nonsensical and self-defeating, devaluation appears to be in vogue. Take Brazil, for instance. If the chairman of a big Brazilian exporter convinced politicians to hike taxes by 25% and channel the proceeds to his company, one could expect riots. But the same end has been attempted through devaluation Newly impoverished Brazilian consumers can no longer afford imported goods. Citizens of Brazil will only gradually notice that their standard of living has declined. Export employers will pay workers less (owing to the devalued currency) while they maintain their own hard currency revenues.

Of course, eventually, exporters’ profits in Brazil will return to normal. Workers will need to be paid more in light of inflation, or export revenue will fall. Sustainable economic growth can only result from innovation and production, not monetary chicanery. (Most frustrating, perhaps, is the US Treasury’s take on Brazil. According to Larry Summers, “The US continues to be prepared to support Brazil as it carries forward with a ‘strong policy’ program”. How depressing.)

PROMOTING FREE TRADE

Protectionism is a form of corruption, favoring certain groups at the expense of the greater population. It is about safekeeping inefficiency from the ravages of progress. It hurts foreign companies from which consumers wish to buy, and hands the business to inferior local competitors.

Ominously, the trend seems to be away from free trade. Inevitably, when times get tough, protectionism becomes increasingly tempting. In the early 1930’s, with the world’s economy already ravaged, protectionist measures (like the Smoot-Hawley Act) shattered what was left of the world’s economic integration, making matters worse.

Keep in mind that the US is among the world’s greatest beneficiaries of free trade. The US is the world’s largest exporter, and it’s an even larger importer. Americans have the knowledge and technology to manage and exploit economic resources around the world. As such, we have a great deal to lose from protectionism and everything to gain from free trade. The onus is on us to consistently battle the hydra.