Protectionism

Love us or hate us, America under a Republican philosophy is all about capitalism and free trade. Some feel money is the root of all evil and I will probably have to agree, but for all the "feel good" policies that our government seems to want to perpetuate (more government jobs and "free" money) it does take MONEY to make those policies run.

Here is another warning sign that we are going in the wrong direction...


Starting To Pay Price For Our Protectionism
By INVESTOR'S BUSINESS DAILY | Posted Monday, October 20, 2008 4:20 PM PT

Trade: As Obama makes political hay off protectionism and promises a new Smoot-Hawley era, it's no surprise our trading partners are beginning to look to other markets — such as Europe. It's a warning.

Our No. 1 trading partner, Canada, isn't stupid. When Obama threatened last February to rewrite the North American Free Trade Agreement on his own terms, our northern ally started looking abroad to other markets.

They found a big one in Europe, which seems to have few hang-ups about increasing exports and signing free-trade treaties. Last Friday, Canada and the European Union held the first talks toward an eventual free trade agreement between the two.

When this goes through, $27 billion in new trade is expected by 2014, according to a joint EU-Canada study. Canada will add an extra 0.8% to its GDP and see income gains of $11.1 billion from the new jobs and higher salaries coming in from Europe.

After all, if free trade with the U.S. bolstered Canada's economy and standard of living by a factor of four since 1994, it makes sense to do more of what brought in that wealth.

Europe's $14 trillion market is an attractive alternative to the U.S. for the Canadians, if it comes to that, and the Europeans are happy to add Canadian investment to the $500 billion investment its three largest economies drew in 2007.

Canada isn't the only one responding to these chill trade winds blowing in from the Washington elites in election season.

Colombia is also preparing to sign a free-trade deal with Europe, as its own free-trade accord with the U.S. languishes after House Speaker Nancy Pelosi blocked it in Congress last April.

U.S. allies are wise to seek other partners no matter what the U.S. climate — the U.S. downturn no doubt plays a role too. But it started with noises out of the U.S. about pulling up the drawbridge.

With a global downturn, free trade makes more sense than ever. That ought to be an election issue for the U.S., which needs to stay globally competitive. Sadly, it's not.

Canada and Colombia are effectively defending themselves from the anti-trade vortex in the U.S. by turning to other markets. The Europeans have no intention of imitating the mistake made by the U.S.

"It's never a good sign when the U.S. becomes protectionist," Philippe Favre, special ambassador for international investment and chairman of Invest in France Agency, the country's foreign investment arm, said in recent comments to IBD.

Like many European officials, Favre thinks the sentiment has been brewing for a while. "If you look at the last two or three years, there was the U.S. preventing foreigners from buying ports," he said. "The Chinese wanted to buy an oil company and they were stopped. Then you have the contract for (air refueling) tankers refused to a European company (EADS)."

Another failure was the World Trade Organization talks. "We have seen since 9/11 a U.S. trend to be more wary of the rest of the world," Favre said. "We probably underestimated the impact (of the attack) on the people and the country in the EU."

Agree or disagree, there's no doubt that protectionism will make America poorer and less influential, protecting nothing. Outsourcing is particularly full of misperceptions.

"Look at the auto industry — Japan started by exporting to Canada and the U.S., and now produces cars in the U.S. They did it because the market itself is in the U.S. We see exactly the same thing in Europe. More car plants are going up in Germany and France than Bulgaria and Romania, even though the labor costs are lower there."

Michael Pfeiffer, managing director of Invest in Germany, told IBD that exports are no threat: "We (Germans) are the largest exporters in the world — it's something we do. We have to do it."

Why? Germany doesn't have the diversified economy America does. "One-quarter of German people are employed for export industries," said Pfeiffer.

With the possibility of a protectionist Democratic president (Barack Obama) working with a protectionist Democratic Congress, the U.S. may be the odd man out when it comes to free trade.

Pity. Because free trade, as any economist will tell you, inevitably boosts the economies of those who engage in it. So others, like Canada, Colombia and Europe, will continue down the free-trade path — toward greater wealth for their citizens — while the U.S. sits on the sidelines.

The world will decide it isn't going to wait for Nancy Pelosi to come around on free trade — it's going to leave the U.S. in the dust.