Back to the Dark Ages

It is February 23 2005. President John Kerry and his economic team - Roger Altman and Alan Blinder from the US Treasury and US trade representative Clyde Prestowitz - are busy converting the US into a protectionist fortress. The North American Free Trade Agreement? Rewrite it to force Mexican wages upward. The World Trade Organisation? Reconsider. Japan? Ralph Nader, special envoy, is just landing in Tokyo. And oh, that meeting with Pascal Lamy, the European Union's trade commissioner? Schedule it later.

This vision of a return to the Dark Ages of protectionism seems improbable, especially considering the sunny American scenario of just a few weeks ago. No protectionist candidate cast his shadow across the election stage - Ross Perot and Patrick Buchanan were nowhere to be seen. The only two serious candidates who talked about protectionism were Dick Gephardt of Missouri and Howard Dean of Vermont. Iowa voters chucked them out early, a humiliation that seemed to underscore the anachronistic nature of the protectionist message.

In short, Americans generally seemed to have internalised the principal economic lesson of the 1990s: that the sort of global commerce symbolised by Nafta is a good thing. Certainly, the US transition to an international service economy has been difficult. Many citizens have lost jobs or know people who have. It is infuriating to see Morgan Stanley and JP Morgan thinking about hiring in Mumbai when people are worrying about the death of manufacturing in Montgomery, Alabama.

Nonetheless, most voters also know that US unemployment dipped to historic lows in the decade following the signing of Nafta; they know that even now, post-recession, unemployment is lower than the average of the past quarter-century. Finally, Americans know that more jobs will materialise eventually. For while outsourcing may "kill" some jobs, it also helps companies to generate more profits, and those profits are reinvested - eventually - in jobs.

But something is changing to obscure this logic. This month Mr Kerry and John Edwards have discovered that the loss of manufacturing jobs is unnerving voters and that calling for "job protection" - precise meaning to be worked out later - has enormous appeal.

Suddenly, the basic laws of economics no longer seem to apply. Without considering much the implications of their actions, the candidates are edging towards old anti-trade positions. Thus earlier this month, Mr Edwards told an audience in Wisconsin that trade deals such as Nafta were bad as they "drive down our wages and ship our jobs around the world". He also spoke repeatedly about "fair trade not free trade".

Mr Kerry has been more circumspect; he, after all, supported Nafta in the Senate, as well as China's entry to the WTO. His economic guru, Mr Blinder, spent his career repeating the formula, "increasing productivity and trade equals growth and jobs". Nonetheless, Mr Kerry has also - as James Hoffa of the Teamsters union recently put it - "evolved" on trade. Nafta, Mr Kerry says, has to be reopened and rewritten. The Kerry campaign has also reminded voters that its agenda calls for a moratorium on new trade agreements until all old agreements are reviewed, and Mr Kerry has said he wants to "bring back" jobs. What can that mean?

The Republicans have also done their part to put back the clock. This month saw a new low for the party, when Dennis Hastert, the House speaker, made the inquisitorial demand that Greg Mankiw, chairman of the White House council of economic advisers, deny his suggestion that outsourcing can increase American well-being. Mr Hastert, a wonderful man but, after all, a former wrestling coach, was forcing Mr Mankiw, author of one of the best economic textbooks, to deny a basic law of economics. ("Recant, Galileo, admit that outsourcing always kills jobs!")

It is easy to argue that this retrograde shift doesn't matter. Bill Clinton also asked for Nafta riders during his first campaign. But by crusading so hard for American jobs, today's candidates are suggesting the problem is free markets. They thus make it virtually inevitable that they will have to deliver protectionism after the election - even in areas where they do not intend such an outcome.

This spells trouble. Democrats these days generally like to portray themselves as multilateralist. But protectionism is inherently unilateralist. If you are interested in international co-operation at all, you can see that this is exactly the wrong moment to bash international trade.

The second problem is that by "protecting" jobs, the new administration is likely to kill them. Mr Kerry's international tax plan will force companies to stay in the US at the expense of profitability. This in turn will force them to lay off workers. His scapegoating of "Benedict Arnold chief executives" certainly won't inspire new companies to list on US exchanges. As for Mr Kerry's domestic tax increases, they represent the one kind of step that ensures lost jobs will not return: they reduce US relative competitiveness.

The third problem is subtler: intellectual dishonesty. Congressmen of the 1990s saw first-hand what trade can do for growth. By ignoring that experience, Messrs Edwards and Kerry - and Mr Hastert even - force Americans to ignore it along with them. In effect, these men are erasing history. You can't get more medieval than that.

© Copyright 2004 Financial Times

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