US Protectionism: Let the best man lose

Monday 15th March 2010
Trade Protectionism.jpg

Last week, two incidents occurred that brought US trade protection into the spotlight. The first was a carefully constructed assault from Brazil. The second was an attack on Boeing from Britain and France.

The incidents are quite different. But they highlight the problems caused by making rules to protect local businesses at the expense of foreign ones – especially during a recession.

Trade protectionism

Trade protectionism is when a government makes rules to favour their own businesses against similar ones from other countries. The main reason is to protect jobs and wealth at home.

Most countries do it. The reason it’s so hated on is because the constant back-and-forth retaliation causes a loss of jobs and wealth everywhere.

Furthermore, it’s inefficient. The best products don’t win and the consumer has to pick up the tab, whether it’s through paying taxes on the product (import tariffs) or using their taxes to financially support certain business (subsidies) – as is the case with American cotton farmers.

Brazil’s fight with US cotton farmers

The US government pays over US$3 billion a year in illegal subsidies to its cotton farmers. They also guarantee loans for any international buyer of American cotton.

It prices millions of Brazilian and African cotton farmers out of the market and is one of the most contested issues in the Doha round of world trade negotiations.

The US farmers say the support provides a necessary safety net. They also point out that the subsidy payments have decreased since Brazil filed its original complaint with the World Trade Organisation (WTO) nearly 8 years ago.

But the payments are still too high.

Last year Brazil got rare approval from the WTO allowing cross-retaliation – putting import tariffs on goods not involved in the case – because America failed to comply with their earlier rulings.

Now Brazil has given up on waiting for America to change its ways.

On Tuesday, it published a list of 100 US goods that would be subject to tariff increases, including cars, cosmetics, wheat and milk powder. Imported US cotton has been the worst hit with a 100% tariff.

It’s only the third time the WTO has given permission for such measures and Brazil would be the first to apply them.

The penalties are worth US$591 million. A further list worth $238 million is expected at the end of the month.

They have given the United States 30 days to come to a negotiated agreement before the tariffs take effect.

The timing seems intent on offering a final opportunity for negotiation. The US Commerce Secretary Gary Locke was already due in Brazil the day after the announcement to promote, of all things, a new US export initiative.

Targeting a wide range of US goods was also intentional. Brazil said it deliberately distributed the retaliation broadly in order to maximise American pressure to cut the subsidies.

The problem is that for any real change to occur it must be signed off by the US Congress.

This is unlikely to happen. They are preoccupied with a fight over healthcare, and probably aren’t keen to take on the powerful farming lobby, or risk losing cotton jobs in the current economic climate.

Britain and France’s anger at Boeing

The second incident highlights a different sort of protectionism.

On Tuesday, American defence company Northrop Grumman and European company EADS pulled out of a joint bid for a US$35 billion contract to provide the US Air Force with mid-air refuelling aircraft.

The reason: they believe the tender specifications were drawn up to suit American company Boeing, even though EADS’s plane was superior.

EADS is the owner of Airbus – the French-based rival of Boeing in both passenger aeroplanes and military manufacturing.

Boeing first won the contract in 2002 and then lost it after criminal collusion was proven between the company and an air-force official.

Six years later, Northrop and EADS won the contract after the air-force decided it’s bigger and more modern (though more expensive) plane based on the Airbus 330 was better value. Most neutral experts agreed.

However, Boeing complained, claiming the tender was drawn up to favour a bigger plane.

The air-force then drew up a new tender in September which effectively removed any interest in plane superiority and brought it down to price.

With a bigger plane, EADS couldn’t compete on price and so pulled out of the bid – leaving Boeing as the sole bidder.

The leaders of Britain and France weighed in on Friday, attacking the deal as “protectionism” and saying the US “shouldn’t be setting the wrong example.”

That’s a little rich coming from them. Almost a third of the entire EU budget goes to mainly French and German agricultural subsidies that price millions of African farmers out of the EU market.

But it shows how touchy the subject is, and unfortunately how retaliation is often the only way to achieve a level playing field in the ongoing battle of trade.

By The Casual Truth

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