-Caveat Lector-
>From http://www.upi.com/print.cfm?StoryID=05042002-045114-5160r
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Comment: Protection -- the American disease
By Martin Hutchinson
Business and Economics Editor
>From the Business & Economics Desk
Published 4/5/2002 6:28 PM
WASHINGTON, April 5 (UPI) -- After putting tariffs on steel and on "dumped"
Canadian lumber, the Bush administration is bringing up heavy artillery in its war
against the world trading system. The Pentagon has drafted legislation that would
give it right of veto over most large foreign acquisitions in the United States.
According to a Financial Times report Friday, the proposed legislation would give the
Pentagon right of veto over all foreign acquisitions worth more than $100 million,
where the company has had Defense Department contracts (even for, say, towels)
worth more than $1 million over the preceding three years, or where the company
was majority-owned by a foreign government.
The thought of the Pentagon making such economic decisions is truly bizarre.
A personal note: On the subway on the way into United Press International the other
morning, I sat in front of two public sector analysts, both of whom had recently been
extensively educated in the arcane art of project management.
"The problem is," said one of them, "the political people always underestimate how
long it takes to get something done. They set a target of designing a Web page in six
months, when everybody knows it can't be done in under nine."
"That's right," said the other. "Only the other day my boss asked me to prepare a
cost-benefit analysis on a $400,000 project in two days. He seemed totally unaware
that it couldn't possibly be done in under a week -- and that's working a LOT of
overtime."
I was startled by the Web page remark (though I know less than I should about Web
page design), but far more so by the cost-benefit analysis comparison. In my banking
days, for an item as small as $400,000, I would have expected to have a perfectly
good cost-benefit analysis done in 20 minutes.
This is, quite simply, the difference between the private and the public sector. The
public sector is so concerned about avoiding career-damaging errors that it designs
absurdly complex procedures for everything, escalating its cost beyond all
comparison. The apogee of such management style, quoted explicitly by the two
analysts behind me as an example of a department that NEVER tried to rush things
was -- of course -- the Pentagon.
It's difficult to see, what, economically, the Bush administration hopes to achieve by
its recent burst of protectionism. Steel is a decreasingly important industry both in
the
United States and internationally, the companies most benefited by the protection are
those whose costs are most hopelessly out of line with world levels, and the U.S. job
losses from increased steel costs are likely to exceed the jobs saved in steel itself.
On lumber, raising the prices will be a severe blow to the housing industry, the
principal support of a staggering U.S. economy recently, while at the same time
annoying severely one of the United State's most reliable allies, and its neighbor.
It is extremely odd that the Pentagon wants to control foreign takeovers when it
lacked such explicit control for 50 years during the Cold War. Of course, Sept. 11
provides a pretext for the takeover, but it is difficult to see why al Qaida is more
likely
to engage in secret ownership of U.S. defense contractors than was the Evil Empire.
How the Pentagon expects to judge the effects of a takeover, or what competence it
will have to do so, is altogether unclear. Certainly it calls into doubt the drumbeat
of
advice to the Third World over the last decades from the U.S. Agency for
International Development and the international institutions, to allow foreign capital
into their industries, even to the extent of taking them over entirely. The United
States, because of its size and highly developed capital market, must be the least
vulnerable of all countries to foreign takeover of the commanding heights of its
economy. Even Britain, which allowed the London merchant banks to be ground into
sausage meat by insensitive German and other foreign buyers, has managed to
meet this national disaster with the usual Stiff Upper Lip.
The theme running through all three of these initiatives, taken within the space of a
month, is that the majority constituency in the United States for free trade has
disappeared. The sharp increase in agriculture subsidies over the last few years
further confirms that this is indeed the case.
Historically speaking, this is hardly surprising. Since Abraham Lincoln, the
Republicans always have been the party of protectionism, successfully in the case of
the McKinley Tariff of 1890, disastrously in the case of the Smoot-Hawley Tariff of
1930. The difference, at least in McKinley's day as in that of Alexander Hamilton, the
inventor of U.S. high tariff policy, was that tariffs were protecting infant U.S.
industries and allowing them to grow to full strength behind a high tariff wall. This
principle was fuzzied at the time of Smoot-Hawley, but has now been thrown
overboard completely -- it is the dying industries, not the infant ones, protected by
the
Bush administration.
Free trade, of course, was something of an accident in the United States. It was first
sponsored in the late 1930s by Secretary of State Cordell Hull, as a southern
Democrat a member of a minority faction within what until then had been the minority
party. It became generally accepted as U.S. policy in the years of Truman through
Kennedy, when rebuilding foreign economies in order to contain Communism was
regarded as of paramount importance. It reached its apogee under Reagan, the
United State's only President with an economics degree, who accepted both the
theoretical arguments for free trade and the practical need for the United States to
lead in free trade negotiations if progress was to be made.
On the Democrat side, the majority northern Democrats were heavily funded by the
unions, who were and remain protectionist -- hence the policy of protecting dying, as
distinct from infant, industries was originally a Democrat specialty, resulting in the
Chrysler bailout and Walter Mondale's protectionist "industrial policy" 1984
presidential campaign. In the 1990s, Clinton remained a free trader, as did George
H.W. Bush and most of the Republican Party -- hence the progress on the NAFTA
agreement, signed in 1994. Clinton's failure to get "fast- track" authority on trade
negotiations from the Republican congress after 1995 was a sign of trouble, as was
the Democrat attempt to link free trade to environmental protection, worker rights,
and other social goals that would price Third World producers out of the market.
But it is in 2002, under a Republican president, apparently because of the accident of
history that Bush unexpectedly carried the small steel producing state of West
Virginia to win the presidency, that the gates of protectionism have swung open. Of
course the European Union, in any case (with the notable exception of Britain) more
protectionist than the United States, has seized with open arms the opportunity to
raise trade barriers.
The outlook for the world economy at this point has to be pretty grim. Protectionism
will restrict the growth in world trade, and more important it will damage the growth
prospects of the world's poorer countries, which will see their traditional avenues out
of poverty, notably agriculture and textiles, closed to them.
At that point, if the world indeed suffers a 1930s-type cycle of protectionism and
stunted growth it will no doubt have a political effect similar to that in the 1930s,
when
Germany, Italy, Spain and Japan swung toward authoritarianism and away from the
liberal consensus. The Pentagon will then have a lot more to do than adjudicate
takeover bids -- and it is to be hoped that it exhibits a greater degree of competence,
and a smaller degree of bureaucratic empire building, in carrying out that, its proper
mission.
Copyright © 2002 United Press International
End<{{{
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