Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Silver Outlook Is 'Excellent' - 23rd July 19
Why The Coming Silver Rally Might Be The Greatest - 23rd July 19
We Are in for Decades of Ultra-Loose Monetary Policy - 23rd July 19
Gold & Gold GDX Stocks Ripping. What’s Next? - 23rd July 19
Stock Market Breadth Warning Signs for the Stock Market’s Rally? - 23rd July 19
U.S. Recession Watch: The Six-Cycle Forecast - 23rd July 19
US Dollar Index tightly wound between: US Bond Yields down on safety flows - 23rd July 19
Stocks Bull or Bear? The Market’s Message - 23rd July 19
This Dividend Aristocrat Is Leading the 5G Revolution - 22nd July 19
What the World Doesn’t Need Now is Lower Interest Rates - 22nd July 19
My Biggest 'Fear' For Silver - 22nd July 19
Reasons to Buy Pre-Owned Luxury Car from a Certified Dealer - 22nd July 19
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Trade Protectionism Solution to Rebuilding America's Industrial Base

Economics / Global Economy Feb 06, 2009 - 10:29 AM GMT

By: Andy_Sutton

Economics Best Financial Markets Analysis Article Protectionism has clearly become a dirty word. Unfortunately, those in the position of dispensing awareness and perspective obviously have no idea what true protectionism is. If it were explained properly, I would venture to imagine that most here in America would be in favor of it. After all, it applies directly to us and our standard of living.

In the 1990s globalization was presented to the nations of the world. Terms like competitive and comparative advantage became part of business lore. Americans, already punch drunk from a 25-year assault on the purchasing power of their currency, were sold on the promise of inexpensive imported goods. These goods would be made elsewhere and moved on barges powered by oil that would be cheap forever. While the former was certainly true, the costs of such shortsighted thinking were largely ignored by those in Washington. We are now witnessing the effects of those costs firsthand.

We cannot afford a trade war”

This week, Senator John McCain proposed an amendment to the pork-laden ‘stimulus' package that would have effectively wiped out the ‘Buy American' clause in the package. Essentially this clause stated that any government or public building projects had to use steel that was produced in the United States. Having already lived through the obliteration of this iconic industry once, the ‘Buy American' clause was very encouraging. However, it appears that in this regard, it will be business as usual, maybe not because we want to, but now because we have to.

To put it simply, America can no longer live on its own production. This is no surprise and has been the case for quite some time. However, we are in a position now where a little leverage might come in handy. Our economy is bleeding jobs and we need to be able to maintain and promote American manufacturing. And contrary to the tenets of globalization, there is absolutely nothing wrong with producing our own goods and services and we should be doing exactly that.

While the argument will be made that our trade partners cannot afford not to trade with us, it is much more likely that they can remain solvent far in excess of our ability to sustain ourselves. This is particularly true in the case of energy, the ultimate staple good. Despite the claims of many that we have enough oil right here in the US to last us umpteen years, even if that were true, you don't just flip a switch and have oil flowing. History should have taught us that much. It takes years in many cases to raise these products, build a transport and distribution network and get them into the economy. Again, we have no leverage.

And in reality, why do these countries need to trade with us anyway? Much of what they get in return is nothing more than IOU's on fancy paper. The chart below illustrates our trade gap in terms of actual goods – goods we either aren't able to or currently do not produce ourselves.

US Trade Statistics (Goods only – in Billions of Dollars)

Year* Exports Imports Balance
2007 1,148,481 1,967,853 (819,373)
2006 1,023,109 1,861,380 (838,270)
2005 894,631 1,681,780 (787,149)
2004 807,516 1,477,094 (669,578)

*Complete data for 2008 available on 2/11/2009

In typical lukewarm fashion, the US Senate shot down McCain's amendment in it's version of what is likely to become a $3 trillion pork-barrel spending package in the coming weeks. For those who are counting, that is $3,000,000,000,000. However, what was most telling is that the balance of the Senate has no respect for American jobs or industry either. This was evidenced by the addition of a proviso that no existing trade agreements be violated by the bill.

This is what happens when you're behind the eight ball. You have no leverage and little flexibility. In the case of trade, it is doubtful that we can even talk tough let alone back it up with substantial action.

‘Free Trade' agreements and the Lowest Common Denominator

Another spin off of free trade agreements such as NAFTA is that in addition to driving our jobs overseas, they created a lowest common denominator situation where wages in developed nations came under downward pressure. The causal relationship is simple to illustrate. If a company can make something in Taiwan for example where GDP per capita is about 1/3 that of the US (Economist World in Figures 2007), then import the goods back into the US, the consumer will benefit from the cheaper good. Unfortunately, for every benefit, there is an equal and opposite detriment, and in this case, the jobs in the US which used to produce that good no longer exist. This is what has happened over the past 25 years or so. We chose instead to focus on a service economy where we basically shuffled papers and intangible goods amongst ourselves and called it an economy. All the while, we racked up massive external debts to buy the real goods we needed to survive.

I will allow that obviously this transformation has not been total. There are still some thriving industries in the US, but rather, I am referring to the net effect of the past 2 and one half decades. Much of the wage gap has been filled with various types of consumer credit whether it is credit cards or, more recently mortgage equity withdrawals. Obviously, as we have seen in dramatic fashion, these levels of debt accumulation proved to be as unsustainable as the dynamics that necessitated the accumulation in the first place.

The Solution?

While we have been showered with announcements that our trade deficit is improving, it must be noted that this is almost entirely due to the liquidation of 2008 (which crashed commodity prices) and the US-led global recession. Were growth to return to normal levels, we would immediately observe the trade deficit returning to its prior trajectory. By way of extension, the same situation exists in the case of the US Dollar. Fundamentally, nothing has changed. Media outlets and pundits alike are reading false signals created by the distortions of a debt-laden, fiat monetary system. It is something along the lines of going to an 80s movie where 3D glasses were necessary to make sense of anything. Only the guy at the door forgot to give them a pair.

For quite some time now this commentary has been a soapbox for the idea that we need to rekindle our productive economy. Never has that been truer than right now. We tried the globalization experiment, and in my opinion, it has been a dismal failure. Sure we got some cheap goods, but as a country, we've become dependent on others for our very sustenance. This is not an enviable position for anyone to be in, especially not for a country that wants to call itself an economic superpower.

That said the upcoming stimulus package could be used help return America to her pre-1980s position of industrial superiority. During the late 1800s and early 1900s, we ran large trade deficits and put them to work building an industrial base that was second to none. We have a chance to use the debt that will be incurred regardless for something productive. Simply handing people checks so they can go buy television sets (thereby sending the money to Asia) is not going to help anything. Rewarding zombie banks for past financial transgressions will not help anything. Taking the ‘stimulus' and building industrial capacity, creating real jobs, and producing high quality products, however, would be a nice start.

By Andy Sutton

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. His firm, Sutton & Associates, LLC currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar. For more information visit

Andy Sutton Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Burt Street
06 Feb 09, 12:08

It's about time someone attacked the prevailing demonization of the term "protectionism." How about looking carefully at the term "socialism" as well? And maybe "free market capitalism."

09 Feb 09, 05:29
Steel Tariffs, great for producers, bad for users

At the end of the day, somone has to pay for all this steel, paying a higher price just screws the buyer, also known as the taxpayer.

Great for producers, it'd be awesome, for me, if I was given a government monopoly on food sales in the US, the rest of you would be in trouble though.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules