Depression Watch: Trade Policy

We’ve been publicly skeptical about the likelihood of the current recession turning into full blown depression since September.

For a depression to occur, Congress would have to dramatically raise taxes, regulations, and trade barriers, and the Federal Reserve would have to significantly hike interest rates.

While the Fed is clearly not preparing to make USD reserves more scarce, policymakers — in the US and abroad — are increasingly hawkish on trade, a development we have been monitoring closely and occasionally posting on. Today, the WSJ editorial page criticized the U.S. steel industry for pushing a Buy American campaign as part of the pending stimulus package:

The U.S. steel industry has now joined autos and ethanol in the conga line to Capitol Hill. Sort of. Steelmakers aren’t seeking government bailout money — a la Detroit and Wall Street — but they are pressuring President-elect Obama and the new Congress to stack any stimulus proposal in favor of domestic producers, even though that would inevitably come at the expense of the nation’s overall economic health.

You might think that the prospect of a $1 trillion spending plan that includes significant outlays for steel-intensive construction projects would be enough to placate an industry that has experienced record profits in recent years. Not so. Daniel DiMicco of Nucor, the nation’s largest minimill steelmaker, said last week that "what we are asking is that our government deal with the worst economic slowdown in our lifetime through a recovery program that has in every provision a ‘buy America’ clause."

Such rhetoric may sound patriotic, but in practice it amounts to protectionism that would only hurt American consumers and taxpayers — and might kick off a trade war the world economy can’t afford. To begin with, domestic steelmakers don’t produce enough steel to meet U.S. demand. According to the American Institute for International Steel, steel imports account for between 20% and 25% of the U.S. market. The industry has also gone thorough dramatic changes in the past decade, including bankruptcies and dumping pension liabilities on taxpayers. Most importantly, there has been tremendous consolidation, which eliminated many producers that once made steel no matter what the cost.

The Journal editorial board’s concerns are not misplaced. Anti-trade pressures still seem to be mounting, with much of the focus on China. For example, in October, Congress asked the U.S. International Trade Commission to monitor textiles and apparel imports from China. According to a Bloomberg story, political pressures look set to widen to other industries and import categories:

In the U.S., business and labor groups, along with lawmakers, are pushing the new Obama administration to take a harder line with China than President George W. Bush did.

Senate Finance Committee Chairman Max Baucus, a Democrat from Montana, plans legislation that would raise tariffs on dumped imports from China and other nations. And newly elected Democratic congressmen such as Larry Kissell of North Carolina and Dan Maffei of New York have pledged actions to stop jobs from being shipped to China.

Lawyers representing companies such as Nucor Corp., the second-largest U.S. steelmaker, NewPage Corp., a maker of coated paper, and smaller textile and steel pipe makers say they are considering new trade complaints against China. During the presidential campaign, Obama promised groups including the National Council of Textile Organizations and the Alliance for American Manufacturing that he would take a tougher stance on China’s currency policies.

A recent story from The Hill also indicates that pressure towards China is likely to expand and intensify: 

…the China Currency Coalition, which has argued that Treasury Secretary Henry Paulson should have taken aggressive actions to force China to increase the value of its currency…is planning an offensive on currency in 2009, and hopes a changed political environment in Washington, which will include larger Democratic majorities in Congress and a Democrat in the White House, will be fruitful. In addition, the image of Wall Street lobbies opposed to action against China has been weakened by the financial crisis…

We’re not hard hearted liquidationists / reallocationists, and we recognize that concerns over domestic and foreign trade policies are often legitimate. Unfortunately, most of the current pressures are calling for monetary and/or trade measures that are the primary levers of beggar-thy-neighbor economic policy. What’s likely to slow these demands, if anything? While Obama appears to buy into the currency manipulation thesis in regards to China, his economic team is not likely to push for a trade war, and they surely understand the importance of addressing these challenges constructively. Hopefully the new President will prove willing to stand up to Congress over these issues. From the Hill article:

Obama’s economic team is led by Larry Summers, who has said repeatedly that the U.S. should not use a stick with China. In an interview with the U.S. News and World Report in June of last year, he said attempting to “bludgeon China is a very risky course.” The U.S. would be better off engaging in a dialogue than in making demands, he said.

URLs:

http://www.symmetrycapital.net/newsandviews/newsandviews/2008123036.html 

http://online.wsj.com/article/SB123137418481962821.html 

http://www.bloomberg.com/apps/news?pid=20601068&sid=ai3pbN.JY7tY&refer=home 

http://thehill.com/business–lobby/debate-renewed–on-u.s.-china-ties-2009-01-07.html