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Protectionism Rears Its Ugly Head
08/10/2009 10:10 am EST
Gary Shilling, editor of INSIGHT, says the global recession will inevitably lead to protectionism as US consumer spending falls and politicians blame foreigners.
Recessions spawn economic nationalism and protectionism, and the deeper the slump, the stronger are those tendencies. It’s easy to blame foreigners for domestic woes and take actions to protect the home turf while repelling the offshore invaders. Politicians find protectionism a convenient vote-getter since foreigners don’t vote in domestic elections.
Protectionism began in the financial arena and took the form of competing to safeguard a country’s financial institutions. But at least that competition was positive for financial systems and economies, even if expensive for taxpayers.
Now, however, protection has spread to its more classical import-export arena with the advent late last year of massive US consumer retrenchment and globalization of the downturn. Consumer retrenchment and the worldwide recession are severely depressing the goods and services sectors as US consumer spending falls the most since the 1930s and unemployment leaps.
There’s nothing like high and rising unemployment to spur attempts to limit imports and promote exports. Recall the high unemployment, slow recovery of the early 1990s when Pat Buchanan and Ross Perot on the right and Dick Gephardt on the left beat opposite sides of the same protectionist drum.
Sadly, the US appears to be among the leaders in protection of goods and services against foreign competition. Vice President Joe Biden said it’s legitimate to have some portions of “Buy American” in last spring’s stimulus package, [arguing] that taxpayers’ money should support US products.
President Obama advocates a super-competitive economy, which requires highly productive workers. Yet the fiscal stimulus law restricted H-1B visas, granted to foreigners with advanced education and skills, for employees of firms that receive TARP (bank bailout) money.
Since the early 1980s, world trade has functioned in a smooth but unsustainable fashion. The rest of the world produced and America consumed. In many foreign lands, households were weak consumers and big savers, so production exceeded domestic consumption. Their production surpluses were exported, directly or indirectly, to the US, where consumers were saving less and less and spending more and more.
With their growing trade surpluses, foreign nations had growing piles of dollars that they recycled into Treasuries and other American investments, helping to hold down interest rates and making it cheaper for spendthrift American consumers to borrow easily and cheaply to fund their leaping debts.
This system was unsustainable because of the collapse in the US housing bubble and the follow-on stock market nosedive and widespread financial crisis. That eliminated US consumers’ ability to continue to borrow to finance oversized spending and imports.
Now, with American consumers embarking on a saving spree, the US will no longer be the buyer of first and last resort for the globe’s excess goods and services. Furthermore, with slower global growth for years ahead, virtually every country will be promoting exports to spur domestic activity. When every country wants to export and none want to import, the pressure for protectionism leaps.
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