Many observers have bemoaned the fact that US politicians have not been able to put together an economic stimulus package. If one believes that increased spending is the right response and that it would have the desired effect, there is a better way that would work more rapidly.
Eliminating or drastically reducing America's trade barriers would instantaneously raise the standards of living of every US household and would lead to an explosion of new economic activity. Reducing or removing tariffs will allow all workers to buy cheaper goods and thus have more money to spend on all other things.
New jobs would be created to handle a larger flow of imports that would offset most jobs lost by removal of wasteful protectionism. Everyone in America pays higher prices so that a few companies can earn higher profits and pay higher wages to a small fraction of all workers.
In turn, corporations and trade unions that represent workers in those industries will grease the palms of politicians who wantonly follow the whims of their paymasters. This diabolical tendency is reinforced by short electoral cycles. It turns out that the House of Representatives required substantial concessions for narrowly approving "fast track" powers for US President George W. Bush that increased protectionist trade barriers to benefit many special interests.
Instead of assisting in the economic development of poor countries, the Housebill will punish them for success by withdrawing trade benefits granted by US law last year to textiles exporters in the Caribbean and sub-Saharan Africa. To appease the steel lobby, tariffs as high as 40 percent on imports will be considered, leading to turmoil in the global steel market and sparking trade conflicts. In agriculture, the requirement that the president must consult Congress on tariff cuts is a sop to producers of sugar and citrus fruit.
In an unrelated move, politicians have unconscionably caved into to craven demands by American textile producers to oppose exemptions from textile tariffs for Pakistan. Treating an ally with such disdain will do nothing to ensure future loyalty.
Adding injury to insult, a new farm bill to replace the 1996 Freedom to Farm Act would raise federal subsidies for US farmers. Five years ago, politicians promised to reduce federal farm subsidies. Over the past three years, Congress has granted billions of dollars in emergency payments to US farmers, making a mockery out of their promises.
Were the legislation approved, it would increase federal subsidies to farmers by over US$70 billion during the next decade. At the very least, this would go against the spirit of the Doha meeting. Should crop prices continue falling, the US may bump against the maximum limit of US$19.1 billion per year allowed under WTO restrictions.
Look out for phony attempts to include populist spending to disguise the wasteful pork spent on corporate farming subsidies. In a never-ending cycle, subsidies encourage overproduction and lead to lower commodity prices that lead to another round of subsidies.
As it is, US agricultural policy has mostly rewarded big farmers in a few states while raising operating costs that force smaller ones out of business everywhere. According to the Environmental Working Group, of the subsidies paid to over 2.5 million farmers, most were received by a small number of large farmers.
Tariffs and subsidies that promote domestic production come at an immense cost that tends to be less visible than the targeted benefits of protectionism. Some of these costs are imposed on underdeveloped economies that suffer from distortions in the global system of trade.
One egregious offense is in the area of protection and subsidies for American sugar producers. Most of the poorest countries in the world can and do grow sugar. Closing the US market to most of them condemns them to continued poverty.
While big growers and processors constantly seek more protection from the effects of low sugar prices, their actions go against the interest of American consumers, taxpayers and food producers. Almost everyone would benefit from the abolition of such programs.
Protecting American growers from foreign competition causes US consumers to pay about US$2 billion more each year for products containing sugar. And price supports encourage so much overproduction that US$1.4 million of taxpayers' money is paid each month to store 1 million tonnes of excess sugar.
While the benefits of a global trading system guided by simple rules would be widely shared, most governments cave in to pressures that lead to the politicization of trade policy. Despite clear rules for global trade and enforcement mechanisms set by the WTO, politicians constantly use trade perks to reward friends and punish foes.
It is bad enough that protectionism comes at the cost of fewer new jobs and lower living standards for all workers in the country that practices it. In a globalized economy, it imposes penury on trading partners, especially the poorest countries. If only American politicians would adhere to principles of free trade rather than their own self-interest.
Christopher Lingle is Global Strategist for eConoLytics.com
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