The New Protectionism?

Will competition cause the United States and Europe to follow protectionist policies?

July 12, 2005

Will competition cause the United States and Europe to follow protectionist policies?

The answers to our problems in Europe are in many ways the same answers to the wider problems that Europe and America face together in the global economy.

Both in the United States and Europe, economic certainties are being eroded.

Manufacturing and trading patterns that have shaped the world's economy for decades — at least as seen from industrial Europe or from Ohio or Michigan or North Carolina — are shifting.

In the space of a decade, China and India have emerged as challenging, dynamic competitors. Industries are moving to Central America and Asia.

There is a fear on both sides of the Atlantic that we have somehow given away too much in the name of free trade — and traded old certainties for cheaper clothes or cars.

Now, if this defensiveness builds into protectionism or isolationism, it will threaten our own prosperity and the international trading system we have labored to build since the end of World War II. We have to help people understand why.

The case for open trade needs to be made again and again. It is the foundation of our prosperity. Our late 20th century prosperity was built on it. Our 21st century prosperity will be founded on it.

Protectionist policies might save a few jobs in the short term, but at the cost of economic competitiveness in the long term.

The progressive removal of quotas and tariffs through the General Agreement on Tariffs and Trade (GATT) unlocked a tide of prosperity that has never risen higher in human history and which — if we manage it right — can now reach into every part of the global economy.

Growth continues in the United States and Europe today, despite the loss of manufacturing jobs to China and white-collar jobs to India. Real wages are up and inexpensive goods from Asia are holding down inflation and helping paychecks go further than ever before.

On the other hand, people do not realize the costs of protectionism. According to the WTO, consumers and governments in the developed world still spend $350 billion a year supporting agriculture alone.

Recent textile liberalization will in time save every European family $200-$300 a year in the cost of clothes.

The WTO estimates textile liberalization could save more than $2 billion a year for Europeans and $8 billion a year for poor consumers in the developing world.

But along the way, it may also cost workers in France, Italy or North Carolina their livelihoods. And that is the crux of the problem.

The benefits of trade liberalization are widely spread and only vaguely appreciated. The costs are borne by a vulnerable — and vocal — few, who may be hit very hard.

Yet, if we protect those jobs from the realities of global competition, every one of us pays, too, in lost savings.

And ultimately, the people we are trying to help also pay for it — because the industry of which they are a part falls further and further behind the global competition.

We do not help industries by sheltering them. We only chain the weight of future obsolescence to their ankle. This situation demands active political responses — but not protectionism.

We are not inert, passive recipients of whatever the global economy throws at us.

We need to promote dynamism and innovation in our economies.

And we need to develop new areas of comparative advantage based on scientific innovation and human creativity.

This economic dynamism is more urgently needed in Europe than America — I readily admit. We need greater flexibility and efficiency in our product, capital and labor markets.

This means investing in the future of those affected by globalization by providing training, increasing productivity and investing in research and development. Not protecting today's jobs, but equipping today's workers to do tomorrow's jobs.

It is instructive to remember our own history here. During the rise of America throughout the 1800s, Europe prospered.

Why? Because new technologies bounced back and forth between us. We did not block it or impede it through fear of economic change.

The telephone was invented by Alexander Graham Bell in Boston in March 1876. It showed up in Britain just six months later.
Thomas Edison started operating an electric power station in London in 1882 — New York got its own just eight months later.

Similarly, the United States and Europe today have to make the political choice to compete. To recognize where we are up against the laws of comparative advantage. To move up the value chain and to bear the costs of research and development, retraining and adjustment.

The rise of China and India is a clarion call to reform and greater competitiveness — not a cause for retreat and introspection.