Many observers have long worried about protectionist pressures even as the economy operates at full-employment. What, I wonder, will occur when the economy slows appreciably and unemployment increases, against a backdrop where the safety of imports is already at issue? Those of us who believe that a open and free trading regime is preferable to a restrictd trading regime should be concerned.
Now, here it may appear that there is a non sequiter between trade and safety regulatoin — but I think there is a link in the popular mind. I think the Administration, in abdicating responsibility for enforcing the regulations that currently exist, has unintentionally (aside from steel tariffs back in 2002-03, which were intentional) aided the cause of protectionists. All one has to do is to consider the current uproar over imports of lead-tainted toys, melanin contaminated pet food, anti-freeze laden toothpaste, all sourced from China. The current trade regulation regime allows for restrictions of imports that are deemed to be unsafe; these “sanitary and phytosanitary standards” have been a long-standing fixture of the international trade regime (specifically, Article XX of the GATT, as well as separate agreements on food safety and plant and animal health).
But in order to use these regulations, one needs a regulatory infrastructure with sufficient resources, and policy level backing, to operate. Otherwise, there will be a temptation to implement more blunt tools of outright protection.
However, instead of maintaining the regulatory framework that was in place, the current Administration has spent the past seven years essentially dismantling the regulatory apparatus — CPSC, FDA, USDA — that would be able to monitor the goods coming into the country (for discussion, see [1], [2], [3] ; a CRS report lays out current deficiencies). Indeed, until the uproar over Chinese food imports, the Administration was intent on closing FDA labs.
Regardless of one’s stance toward whether these regulatory agencies are a good thing or not, the very fact that the general public now distrusts some imported goods that are circulating within the borders of the U.S. means that there is incipient pressure to restrict goods from a specific country (China) (see Drezner’s post making this point). Yielding to such pressures might allay some fears (although it is not clear that on a proportional basis, China is the biggest violator of phytosanitary standards — see Table 3 of this CRS report, which notes that Mexico is ranked first for number of refusals), but it would put the US in violation of the nondiscriminatory clause of the WTO’s articles, thereby justifying retaliation on the part of China. Should we find cause to reject imports from other countries, they too will have cause to retaliate against the U.S.
My impression is that the current Administration will likely take a “just say No” approach. With the balance of power shifting ever away from the executive, and toward the legislative branch, I suspect that this approach will not be sufficient to stanch the protectionist surge.
So what is to be done? Fortunately, so far, polling data does not indicate a push for more protection as a consequence of these events — but one (well, okay two) more recalls by toy manufacturers, and who knows?
If the Administration really wants to stem the tide of protectionism, it might have to consider actually enforcing the regulations in place (see [1], again, for detail). That would require a high profile commitment to fund the agencies that are charged with monitoring the safety of goods that we all consume, thereby allaying consumer fears. The Administration has an opportunity to do exactly that, in response to the report of the special Presidential panel, set to present its report on September 17th. And, as an aside, a little more than lip service to reducing the uncertainty facing workers exposed to international trade competition wouldn’t hurt, in terms of trying to sustain the pro-free trade constituency.
Technorati Tags: China,
trade policy,
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Firstly, toxic Chinese exports have showed up on the shore of Europe, Central and South America, and elsewhere. Perhaps the governments in all those places are also “abdicating responsibility for enforcing the regulations that currently exist”?
Secondly, why should the importing countries take on the primary burden of policing foreign manufactured goods? Shouldn’t the exporters do their share?
Much like the market for contaminated CDOs, if customers have difficulty distinguishing the good from the bad, they will simply choose to withdraw from the market. Perhaps the same questions about regulation arise, except in the case of the Chinese, they will be the ones motivated to regulate.
I’m sorry but I don’t see open and free trade as having the executive branch exercise import control rather than the legislative. Whether the executive branch or the legislative branch it is still increased government intervention. I see free trade as allowing the market to exercise control.
The recent problems with China have been more destructive to the Chinese export market than most realize. Consider that because of the problem China has seen one executive commit suicide and at least two others sent to jail. The Chinese know how serious this is.
The market is doing what the government could never do. China is losing business. They had to recall millions of goods and orders for millions more have been cancelled with toy purchases shifting strongly to US companies.
If the administrative or the legislative branch jumps into the fray with their normal blanket regulations the result will be to hinder international trade. Their understanding of regulation is using a shotgun to kill a fly.
Government makes the problem worse. For example consider that Presidential candidate Chris Dodd has called for suspending all toy imports from China. Apparently he is unaware that 80% of all toy imports are from China, or perhaps he doesn’t care. Did Senator Dodd support the Japanese and Europeans for refusing US beef imports because of Mad Cow Disease? Would he have supported the Japanese and Europeans suspending all food imports from the US?
What is lost in the political posturing is that US industry does more testing of products than the FDA ever could. The FDA only tests 1% at most and in truth that is probably a waste of money. The FDA has no incentive to improve their testing but businesses do. General Mills, Kellogg and Toys R Us immediately increased their inspections of all imported goods in the wake of recalls of tainted dog food, toothpaste and tires. This includes unannounced inspections of Chinese manufacturing plants. And it has inspired food companies to test for contaminants not even on the inspection list. Toys R Us has created two new positions to oversee procurement and product safety. And all of this was done while Charles Schummer was still searching for the TV cameras.
If you actually believe in free international trade you will encourage both the executive and legislative branches to stay out of the way and not make things worse.
Menzie, are you an actual economist? Your arguments in support of more regulation are weak.
The bottom line is that corporate reputations are the best means of regulating these imports. Mattel f-ed up, and it is going to pay a price in the market for that. Their quality control was poor, and you can be damn sure that they’re going to improve in that area moving forward. Other big corporations will as well, because the negative publicity is not worth the low cost.
The feds can’t enforce the regulations on the books. There aren’t enough inspectors, nor should there be. Corporations doing the importing need to be the enforcers.
Buzzcut: Hmm. I think I recall studying a lot of years of economics. Well, I’ll let others decide.
My main point is that in order to restore confidence so that a pro-free trade constituency can be sustained requires some action. I think that’s a reality.
By the way, not all imports into the U.S. are undertaken by U.S. firms. So what about the other goods?
anonymous: My argument is not a moral one, merely a pragmatic one. Maybe self-regulation (as buzzcut suggests) will arise — but probably later rather than sooner.
DickF: You’ve just forwarded an internally consistent, but I believe irrelevant, counter to my argument. “Just saying No” is not sufficient, and so we need a second best, that works to sustain support for WTO-consistent policies.
Buzzcut,
I disagree with you concerning Matel. It was their quality control that discovered the questionable toys and they immediately ordered a recall. It was not the government.
But Matel knows how serious this is concerning their reputation. They have taken out adds to assure their customers that their quality controls do detect these problems and reassuring that they are increasing their inspections.
Menzie,
Thank you for your response.
This a serious question and is not intended as an argument. Given that the FDA only inspects 1% of products what would you suggest as the minimum increase in their budget to meet your suggested requirements? Twice the existing budget? Ten times?
Buzzy, did you actually make it out of high school?
Are you actually employed by anyone?
How many buried miners in Utah would it take to make you consider that this administration only pays lip service to any kind of safety standard that might be in the interests of ordinary people (this includes the 3 Mexicans of those 6 who were buried) rather than industry profits?
I don’t imagine you listen to NPR (“supported by you the listener AND…”)[Socialist Radio to you no doubt] but they saw no cause to comment on The President’s claim that he would talk with his Chinese counterpart about safety. Could be the public needs to be brought up to speed on these ‘co-ventures’ and the costs of deregulation by the US federal government.
Those safety regulations do far less harm (if any) to free trade than what is called “intellectual property”, the most potent and costly form of protectionism since it imposes thousand of percent tariffs, and up to infinity (import ban).
There is no free trade and no free market where there is intellectual property, that’s simple.
“protectionnist surge” is just laughable epsilon in this context.
I think I recall studying a lot of years of economics. Well, I’ll let others decide.
Sorry, sometimes I wonder! You’ve been in Madison too long, maybe.
My main point is that in order to restore confidence so that a pro-free trade constituency can be sustained requires some action. I think that’s a reality.
Maybe I’m just an idealogue (maybe?), but I just don’t think that this is an economic argument. It’s a political argument, yes, but in terms of economics, it can’t be justified.
How many buried miners in Utah would it take to make you consider that this administration only pays lip service to any kind of safety standard that might be in the interests of ordinary people (this includes the 3 Mexicans of those 6 who were buried) rather than industry profits?
Sorry, dude, that has nothing to do with Dubya. Regulation has nothing to do with that mine collapse. In fact, mine accidents are down every year since Dubya was elected.
Sometimes a tragedy is just a tragedy, and it shouldn’t be used by leftists for their political agenda.
I don’t listen to NPR, I listen to XMPR. I gave up on NPR when they canned Bob Edwards, and followed him to satellite radio. Also, no pledge drives!
Buzzcut: I get the impression you equate straight line neoclassical economics with economic theory as it now stands. I think economics has been enriched in recent decades by the recognition that, in the absence of perfect information, a market that is left to its own devices is not necessarily a market that leads to an optimal outcome. This was the message that garnered Akerlof, Stiglitz and Spence the Nobel prize. So here, I disagree, I think there is economic content to the argument I’ve made.
To drive home my point, I have to ask you whether you believe there should be a complete absence of regulation of banks? If you think so, then I will assert that you are living in a land of denial. Governments around the world have regulated the financial system because information asymmetries make the costs of regulation less than the alternative.
Menzie,
I do not want to put myself in the same category as buzzcut because he is out of bounds in his criticism, but I have to say that your government interventionist positions expressed in your September 5, 2007 07:34 PM post is exactly what brought us the Great Depression of the 1930s and the Great Inflation of the 1970s thankfully saved by a partial return to classical economics in the 1980s.
You condemn classical economics and free markets because there is not perfect knowledge but a lack of perfect knowledge is exactly why the command economy is a failure (Thank you FA Hayek). Free markets are not perfect but they opperate from much more knowledge than any government agency, and yet, the market by its very nature does not need perfect knowledge as does the command economy. If the command economy makes a mistake it brings down the whole economy. If a segment of the market economy makes a mistake it is limited to only a small portion of the whole.
I know that you are a true believer in merchantilism but throughout history merchantilism has failed with economies being saved by a return to classical principles.
The failure of the grand demand side experiment of the 1970s failed miserably saved by a return to the classical.
I would encourage you to consider not being one of the doctors still bleeding his patients. Economics should not be the dismal science but the science of prosperity.
DickF: You must have read a different history of the Great Depression than I did. I thought it had something to do with the failure to provide adequate liquidity to the banking system, and the consequent credit crunch. But I admit that was an old book (Milton Friedman, Anna J. Schwartz, “Monetary History…”).
I think it’s also misleading to equate some government intervention with a command economy. My original post advocated enforcing the laws on the books, not setting up an American GOSPLAN.
Finally, as I uncerstand it, “merchantilism” [sic] is the belief that exporting is the path to national wealth, and governments should intervene to promote exports. I don’t know where you’ve detected this in my writings. Perhaps you have me confused with someone else?
Menzie wrote:
You must have read a different history of the Great Depression than I did. I thought it had something to do with the failure to provide adequate liquidity to the banking system, and the consequent credit crunch. But I admit that was an old book (Milton Friedman, Anna J. Schwartz, “Monetary History…”).
Menzie,
Yes, I have. The old mythology is being challenged today.
The monetarists do promote what you have stated concerning the Great Depression but Friedman’s own statistics do not support this conclusion.
Prices (Based on the year of FED creation 1913 as 100%):
1922 138.5;
1923 144.1;
1924 140.5;
1925 148.2;
1926 143.2;
1927 136.6;
1928 138.5;
1929 136.5.
Now Friedman uses M2 in his analysis and from 1921-29 there is a 45% increase, or 4.6% per year. Friedman, in an interview in 2006, recommended a 4% increase in the money supply as optimal. This is strong evidence that prior to 1929 both the money supply and the price level actually indicate no deflation and actually are pretty normal.
That being the case deflation could not have been the cause of the Great Depression. Now after the Depression was well under way there were some stupid actions by the FED concerning such things as increased bank reserves in the late 30s that did cause deflation, but all in all the Great Depression was a failure of government intervention, especially the executive branch. They attempted to prevented wages and prices from falling, inplemented huge tax increases to fund public works programs and to purchase and destroy products (potatoes were burned, cotton was plowed under, pigs were destroyed, produce was purchased and warehoused) all while there were bread lines in the big cities. Hoover held government contracts from companies that lowered wages and prices while Roosevelt’s Blue Eagle program forced businesses to keep prices high even though people could not afford to buy the products at the official prices and the shelves were overflowing. The result of government action was massive over-supply and pent up deflation such that as each of the failed programs was relaxed prices tumbled.
I could go on but this should be enough to encourage others to take a second look at the current myths about the Great Depression. They just don’t hold up to the facts.
DickF: I’m going to let others debate you on your interpretation of the effects of fiscal policy. However, I think your choice of years does not address the issue Friedman & Schwarz and Bernanke raised — namely in the wake of the Wall Street crash, the Fed was insufficiently responsive. See the monetary statistics here. In addition, ex post real interest rates rose during this period.
So, let me just say that sometimes the received wisdom is…correct!
Menzie,
Thanks for the link. Yes, I have seen those numbers and even using the quantity theory, meaning only looking at at supply, the numbers do not support such a disaster as the Great Depression.
Looking at them using the value theory of money, meaning taking into account both the supply and demand for money, the changes in response to bank failures and business failures actually demonstrate that the numbers are reasonable because demand for money fell. If the FED had not reduced the money supply there would have been inflation. The FED did not cause the decrease in prices they reacted to it.
I agree with you in that I do not want to enter a full blown debate of the Great Depression, but let me offer some information that perhaps will put questions into the minds of those who visit here.
The Smoot-Hawley tariff was passed in 1930 but it was part of Hoover’s platform in 1928. His election put everyone on notice that tariffs were going to be raised significantly. Many countries around the world passed tariffs in advance of Smoot-Hawley with a priviso that they would be reversed if US tariffs were not raised. The international trade war began before Hoover even had time to pass his promised tariff. Ultimately Smoot-Hawley was passed, over the formal objection of 1,000 economists, placing an effective 60% tax rate on 3,200 imports significantly shutting down international trade.
In the wake of the stock market crash Hoover went back to his roots when he the director or relief for Belgium in WWI and he jumped into massive public works spending. Total federal spending rose from $2.9 billion in 1929 to $4.4 billion in 1931. Where did the money come from to pay for the 52% increase in spending? In 1931 the deficit was $462 million, part of the largest deficit spending in peacetime for any period prior.
Then with the recession roaring the Republicans did the unthinkable. In 1932 they pushed through a massively destructive tax cut taking the top tax rate from 25% to 65%. Consider what such a tax increase would do to you. But even worse the lowest rate went from 1% to 4%. Those who could least afford it saw a 4 fold increase in taxes.
There is much, much more especially when after Roosevelt took over, but just this little taste should demonstrate that the fiscal mistakes by the President and Congress were much more destructive than any monetary policy, yet until recently the fiscal mistakes have not been analyzed. Analysis of the fiscal mistakes are critical because Congress and the President keep making these same mistakes over and over. But with Congress holding the purse strings of most economists, they will be very careful not to criticize the hand that feeds them.
While the FED did not correct the mess, they certainly did not create it, and it is actually questionable that they could have done much anyway.
I get the impression you equate straight line neoclassical economics with economic theory as it now stands. I think economics has been enriched in recent decades by the recognition that, in the absence of perfect information, a market that is left to its own devices is not necessarily a market that leads to an optimal outcome.
Okay, I think that we’re going into the realm of phillosophy, not economics.
Economists make the assumption of perfect information to make their models work mathematically, or to simplify their models. But that is hardly a reason to say that markets require perfect information to work.
Maybe I’m too common sense oriented, but it seems to me that the history of market regulation is one of unintended consequences and moral hazard. So in the banking example, I see the savings and loan disaster of the ’80s as a natural consequence of regulation, and wonder how much mayhem an unregulated system would have to cause to make up for the mayhem caused by the moral hazard of regulation.
Buzzcut: Working off of Mishkin’s money and banking textbook, I’d say ill conceived deregulation led to the problems that culminated in the S&L debacle, and associated bailout. R. Glenn Hubbard’s treatment is similar — and I don’t think he could be characterized as a raving pro-regulation type (full disclosure: I worked for Hubbard when he was CEA chair).
But I take your point — cost-benefit is the way to judge the issue.