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Why Politicians are Suckers for Protectionism

Politics / Government Intervention Jan 26, 2009 - 07:53 AM GMT

By: MoneyWeek


Best Financial Markets Analysis ArticleWell, we managed to get through the weekend without any more banks being nationalised, or brave new stimulus packages from the Government being announced.

Perhaps the reaction to last week's put them off. Share prices in the banking sector were demolished, while sterling did a nose-dive from an already weak position.

(For more on the bail-out and its effects, see this week's issue of MoneyWeek click here to get your first three issues free).

But don't worry. The real problem with last week's bail-out package apparently, is that the City just didn't “get it”, reports The Times today. According to the Government, all those silly bankers and investors just didn't grasp the subtlety of what it's trying to do.

I suspect that the City's main concern wasn't so much the contents of the bail-out package as the fact that another was needed so soon after the last one. Not to mention the record-breaking loss reported at Royal Bank of Scotland the next day.

But at least the Government's trying to do something. That's got to be good news. Hasn't it?

Government intervention could be a disaster

People who argue that the Government “must do something” often seem to take the view that doing anything at all is automatically better than doing nothing. The idea is that, even although Government spending tends to be wasteful, at least some of it has to stick. So the economy will see some benefit at least, even if it's only £5 in every £100 spent.

It wouldn't be so bad if this were true. An ineffectual government isn't ideal, but at least it can't do any real harm. The real problem is that there's a very good reason to try to get the Government to do nothing. That's because its actions often make things worse than they need to be.

If you want to see how, the most obvious disaster scenario is starting to gain some traction in the US . The Times reports that US exporters are trying to stop the new President from inserting a “Buy America” clause into his $825bn bail-out package.

The American Steel First Act would mean that US companies would have to, well, buy American Steel first for use in $64bn-worth of federally-funded infrastructure projects, reports the paper.

The problem is of course, that foreign steel makers don't like the idea of being shut out by blatantly protectionist rules. European steelmakers have already said they would urge the European Commission to challenge the clause under World Trade Organisation rules if it went ahead.

You'd think that everyone would have learned from the last time. In the Great Depression, attempts to protect US jobs with the Smoot-Hawley Act saw global trade dry up, arguably dragging the depression out for much longer than was ever necessary.

The problems with protectionism

But the problem is that protectionism is very attractive to politicians, because it looks good in the short-term. Splurging taxpayers' money on new infrastructure projects becomes quite a hard sell if a lot of that money seems to be going overseas to pay for raw materials. That's when you get people complaining that American taxpayer dollars are paying for non-American jobs.

Protectionism seems the ideal solution to this objection. It secures jobs in favoured industries (at first). It appeals to nationalism. It stops the jobs from flooding overseas. It gives the illusion of a strong government standing up for the people.

But all you're actually doing is securing one group of workers' jobs at the expense of another. If you start discriminating against foreign imports, then foreigners start discriminating against you too. The US steel lobby might be quite happy with the idea that their products get special government protection, but the US export lobby isn't quite as overjoyed, because they're the ones who'll feel the pain of reprisals first.

Another worrying sign from the Obama administration

This isn't the only worrying sign from the Obama administration. China has reacted against accusations by the incoming US Treasury Secretary Timothy Geithner that the country is manipulating its currency by denying the charge.

Su Ning, a Chinese central banker, said that “we believe that faced with the financial crisis there should be a spirit of self-criticism. The international community is currently working together in actively responding to the financial crisis, and it must avoid exploiting different excuses for renewing or encouraging trade protectionism.”

It's not a bad approach to take. But self-criticism isn't something that politicians do well. Everyone would rather blame someone else. For many people, including Gordon Brown, it's the Americans, with their sub-prime loans. For the Americans, it's the Chinese, for forcing them to buy all those cheap Chinese goods with money which they had also ultimately borrowed from the Chinese. If only the Chinese didn't work so hard and save so much, everything would have been fine.

When that kind of topsy-turvy logic is taking hold, you can believe anything unfortunately – including the idea that a good way to solve this crisis is by shutting down global trade. My colleague David Stevenson wrote about the dangers of protectionism in a recent issue of MoneyWeek - to read this article, click here: The return of protectionism

By John Stepek for Money Morning , the free daily investment email from MoneyWeek magazine .

© 2009 Copyright Money Week - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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Mark Gendala
19 Jun 09, 02:46
Globalising the globalisers


Economics professors - as of tomorrow, lectures will be delivered into your universities from Asia via interactive videoconferencing screens for only 10% of your salaries...

How are you going to feed your families?

Mark Gendala

Melbourne, Australia

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