“Institutions have a way of evolving over time – after a few years they no longer resemble the originals. Early in the twenty-first century the United States is no more like the America of 1776 than the Vatican under the Borgia popes was like Christianity at the time of the Last Supper, or Microsoft in 2005 is like the company Bill Gates started in his garage.” (Bill Bonner and Addison Wiggin, Empire of Debt)
As the global economy suffers from a deepening recession the drumbeats for protectionism grow louder in the U.S. and aboard. But what do the advocates for protectionism mean in relation to the dynamics of a fully integrated 21st century globalized economy?
I realize the drumbeats for protectionism is about protecting jobs and I’ll return to this shortly. But I raise the question for several reasons, the explanation of which is best conveyed by contrasting international trade today versus that of the 17th century where protectionism has its roots.
The traditional interpretation of protectionism as defined by Webster is; “an advocate of government economic protection for domestic producers through restrictions on foreign competitors.” Protection is defined as “the freeing of the producers of a country from foreign competition in their home market by restrictions (as high duties) on foreign competitive goods. Wikipedia explains protectionism as “…the economic policy of restraining trade between nations, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other restrictive government regulations designed to discourage imports, and prevent foreign take-over of local markets and companies” Similar explanations are also available at Investopedia.
International trade is explained as “…the exchange of goods and services between countries.”
These interpretations largely reflect 17th century international trade relevant at the time when a nations producers where domestically based and more proprietary in nature. Nations primarily traded for goods and services they either could not produce themselves or not as efficiently as someone else. Traditionally a nation’s collective domestic producers (DPs) were their source for attaining stature and wealth in relation to other nations. Gross Domestic Product (GDP) is the accumulative total of all that a nation’s DPs produce. The nation’s DPs are their family jewels so to speak and protectionism came out of a desire to guard these treasures. Traditionally nations were more independent and their DPs expanded, invested, and were the source of jobs within their own borders.
The key distinction to make is that our traditional understandings about protectionism are actions undertaken by a country to protect its domestic producers from foreign competition within their home market. The debates waged over the merits for protectionism remain constructed along these traditional interpretations but as we will see a dramatic structural shift has occurred in global commerce rendering, in my view, traditional protectionism obsolete.
“The first protectionist movement in the U.S. was launched in 1820, headed by the Pennsylvania iron industry…in grave danger from …foreign competitors.” These measures were undertaken as they were deemed a necessary defense from foreign competition and perhaps they had merit considering how international trade was generally conducted at the time.
More recently protectionist provisions have been “Buy American” written into the Obama stimulus package, the “American Recovery and Reinvestment Act 2009.” These provisions “…mostly bar foreign steel and iron from the infrastructure projects laid out in the economic package, requiring with few exceptions, that all stimulus funds use only American-made equipment and goods.” Obviously the purpose for these provisions is to create jobs in the U.S.
But the provisions have met strong resistance from “U.S industrial giants including Caterpillar, General Electric and the domestic aerospace industry as well as the Chamber of Commerce.” Why would U.S. companies and the Chamber of Commerce oppose “Buy American” legislation? “Opponents, including some of the biggest blue-chip names in American industry, say it amounts to a declaration of war against free trade and might spark trade wars.” For some of us Americans this may not make much sense but the following information could shed some light on the subject lending credence to my suggestion that traditional protectionism is obsolete.
The dynamics of trade began to change drastically in the late 1970’s when many U.S. companies facing stiff foreign competition began to transfer the manufacturing of their products to other nations in order to survive and recapture lost market share. This was the spawning of today’s multinational companies (MNC) and launched the march toward a globalized economy. As a consequence international commerce today consists of a labyrinth of MNCs with production capabilities and various affiliations with entities located outside their country of origin and these practices have blurred national borders and commerce interest between companies and nations from those of the past.
The transferring of manufacturing occurs through various methods which most of us are familiar with. Although the methodologies may vary the negative affect on U.S jobs are equal. I briefly summaries them here as each play an integral role in contributing to the structural shift that has occurred through globalization.
The most recognized is perhaps outsourcing which refers to a U.S. MNC contracting with another company in another country or within the U.S. to perform task that were done in house, replacing its own labor with that of another. When contracting involves a company in a foreign country these products are exported to the U.S. MNC becoming an import to the U.S when the U.S. MNC orders these products for distribution in our market. Outsourcing provides generous profit potentials for U.S. MNCs.
Another is offshoring which refers to a U.S. MNC substituting foreign workers for U.S workers. Offshoring differs from outsourcing in that the U.S. MNC establishes subsidiaries or affiliates in another country. These affiliates are often owned either entirely or in part by the parent U.S. MNC thus creating integration in partnerships mostly operating independently of governments. As with outsourcing products shipped from foreign affiliates to U.S. MNCs are imports when destined for distribution in our market.
During the late 1970’s the manufacturing infrastructure was underdeveloped in many parts of the 3rd world countries necessitating the need for development in these areas with a focus in Asia and especially China. Once established, outsourcing and offshoring began in earnest in the mid 1980’s continuing to this day.
The third method receives very little publicity and is virtually unregulated by the U.S. government but is known as trade offsets. This is the “transferring of technology and/or production by U.S. MNCs to another country in return for a sale and involves high-paying, high-technology jobs in the export sector, typically the defense sector, potentially impacting national security. Offsets can involve outsourcing, licensing procurement, subcontracting, research and development, foreign investments, countertrade, financing, and co-production. Over [a] 14-year period 1993-2006, U.S. companies reported over 8,500 transactions, valued at $42 billion that involved the transfer of production and technology to 42 countries. A U.S. government report concludes that over 16,000 jobs were lost each year over the 2002-05 periods due to offset transactions in the defense industry.”