Beware the Protectionist Temptation

By Derek Thompson

Caterpillar is the world's largest manufacturer of construction equipment and a bedrock of U.S. exports, which could be key to speeding up our slow-motion recovery. So when Caterpillar speaks, newsmakers and news writers should listen. 


Here's what the company observed about the global economy while celebrating its blockbuster third quarter:
-Caterpillar expects the world economy to grow by better than 3.5% in 2010 with developing economies growing by about 7% -- the best year since 2007 -- and developed countries at only slightly more than 2%.

-Angst about employment threatens political support for free global trade. "High unemployment is undermining public support for open trade," [Caterpillar] said. "If recognizable progress does not occur in reducing unemployment, governments may impose restrictions on imports that would disrupt world trade."
In a sentence: The world is recovering faster than us, but high unemployment could stoke anti-trade fever in the United States. Lingering joblessness threatens to force policymakers to wage a political war against world trade at the very time that we need the world's demand to cure our high joblessness.

We're already seeing traces of protectionism in the Tea Party and in Democratic Party attack ads. With unemployment expected to stay above 9 percent for another year, don't bet against protectionism going viral in the mainstream of both parties. You could see it in the form of Buy America provisions, or tariffs threats against Asian currency manipulators.

We'd love countries to simultaneously appreciate their currency, so that they can buy lots of American stuff while the rising price of their goods helps to shrink our trade deficit. But there's no good short-term strategy to make that happen. We can slap China with the "currency manipulation" label, but then what? We can threaten sanctions and tariffs on countries whose low currencies are expanding our trade gap, but once you start walling off trade, it's only a matter of time before you're embroiled in a broader trade war.

The awful paradox of our deep balance-sheet recovery is that the American consumer is in debt, out of work, and looking for things to blame. But if we start reacting by punishing foreign trade markets, we'll choke off foreign demand at a time when domestic demand is hurting. Protectionism is tempting when the economy is sour, but it would only make things worse.

This article available online at:

http://www.theatlantic.com/business/archive/2010/10/beware-the-protectionist-temptation/64992/