Our Fear of Protectionism is a Myth

by Chris Wilson, www.CycleSpreads.com & www.CycleETF.com| February 4, 2009

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For years now, we've heard non-stop rhetoric from all politicians from both parties that any move toward protectionist policies will trigger an international trade war, potentially crippling our economy and leading to even more job losses.  All I have to say to the political establishment is your argument has a few holes in it.

A good place to start would be plain old common sense.  Most of the time when politicians are referring to a trade war, it's their fear that the Chinese will not only increase the cost of their exports to us, but will also call in our IOUs.  First, what would compel the Chinese, in the face of declining demand, to increase their prices?  Their population needs jobs too, remember?  Their customers (us) have the leverage in a contracting economic environment, not them.  Secondly, the Chinese are like any other country in regards to our debt.  If the dollar is a safe haven, they hold treasuries.  If our dollar is seen as declining in value, they'll dump it like a bad habit.  Let's not confuse the dollar's relative strength (or lack thereof) with protectionism because one has little to do with the other.  The Chinese are not idiots and will do whatever is most profitable for them, regardless of the paranoia of our political establishment.

Is it wise to consider policies that would protect and encourage more American jobs, particularly production jobs?  I can't even believe I have to ask that question!  Of course it is, because we don't make anything any more.  Any economy is ultimately valued on its productive output, not its ability to create new mortgages or hedge funds.  And now that those elements of our economy have been painfully stripped away, it should be all too obvious that some form of pro U.S. worker policies are exactly what we need.  Tax incentives for U.S. manufacturers who employ U.S. workers would also help immensely, and would likely be welcomed by the nation's employers given our existing high corporate tax rates. 

Naysayers claim that it's too late- those jobs will never return.  It's true many will not, but it's also true that some will, especially if we get serious about this.   We've got to start somewhere, and now is as good a time as any.  Fear mongers will point to examples like Tim Geithner's statement about the Chinese manipulating their currency, and how offending your largest creditor isn't a good idea.  When you're in a deflationary vacuum, yet your population is still the wealthiest in the world, who really gives a damn about offending another country holding our debt?  I've got news for you- they aren't going to loan us any more money unless we can pay it back anyway.  We need to test the waters on this- push the envelope as far as we have to until we do see the retaliation that would supposedly ruin us financially.  A good business person increases their prices until they get push back, and we need to do the same as far as rebuilding our own capacity to make things that other countries want.

Wouldn't it be prudent to get some real jobs back here if we're going to have to monetize our way out of this?  We can't have a healthy society without a middle class; it's what makes us Americans and leads to productive jobs that help insulate our economy from these kinds of downturns.  These concepts are not leftist, liberal, conservative, or pro labor- they're American.  Does Washington understand the difference?

Copyright © 2009 Chris Wilson
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