By John Rutledge
At Nobelist Robert Mundell's recent Santa Columba Conference,
the assembled group of specialists in international finance agreed
on two points: 1) the global economy is growing faster than at any
time in history, and 2) the number one risk to sustained global
growth is rising protectionism in the United States.
This week in Washington, short-term politics won over long-term
economics and basic humanity when the Senate Banking Committee
voted in favor of a protectionist bill, joining a long list of
bills aimed at China.
There is a race to the bottom among American politicians to
determine who will get the honor of leading the lynch mob that
blames China for every real or imagined economic ill. These
political leaders are competing for short-term political gain at
the risk of the global growth that is lifting billions of people
out of poverty around the world. Worse still, they know exactly
what they are doing.
On Wednesday of this week, 1,028 economists signed a petition to
members of Congress, advising them of the immense benefits of free
and open trade in goods, services, and capital, and warning them of
the grave risk to growth and stability, both in and outside the US,
from escalating protectionist measures that could lead to a global
trade war.
As one of the signers of the petition, I spoke on the issue at a
press conference on Capitol Hill organized by the Club for Growth,
who ran the signed petition as a full-page display in the Wall
Street Journal. Let's hope we had some effect on the policy
makers.
Not coincidentally, 77 years ago, in May, 1930, 1,028 economists
signed a similar petition, which ran as a full page in the New York
Times. They were trying to convince Congress not to pass the
Smoot-Hawley tariff legislation. They failed. I am convinced the
tariffs then were a major contributor to the length and severity of
the Great Depression that followed.
Today's global economy is in great shape. Global economic growth
in 2006 was an incredible 5.4 percent, compared with 2.9 percent
during 1950-73, when Europe and Japan were rebuilding their
economies after the war, and 1.3 percent during the 1870-1913
industrial revolution. The IMF predicts 5 percent growth for both
2007 and 2008, which would mark the sixth straight year of growth
in excess of 4 percent. Developing Asia - the epicenter of the
world's economic growth explosion - will grow at nearly twice that
rate, led by the spectacular growth of China.
The US economy is in good shape too, with growth in excess of 3
percent, contained inflation, profit growth of over 14 percent in
the most recent quarter, and long-term interest rates below 5
percent.
If things are so good, then why are voters demanding
protectionism?
I am convinced that today's chorus of protectionist actions
represents more than the profit-seeking actions of a few special
interest groups. Today, when a political leader announces a new
protectionist measure, crowds cheer. I believe that rising
protectionism, nationalism, and social instability are rooted in
the turbulence caused by rapid economic change.
Rapid economic change raises average incomes but it creates new
industries and destroys others, creating uncertainty in the lives
of many people. Those, whose fortunes have been temporarily or
permanently reduced, as well as those who are simply afraid of
change, appeal to political leaders for relief; political leaders
who promise to stop or reverse change will gain power over leaders
who counsel openness.
Left unchecked, this process can lead to global trade war as
country after country erects non-market barriers to the smooth flow
of trade. Ultimately, these mounting frictions can produce system
failure, akin to the blackouts caused by failures of an electricity
network, in which the global economy stops growing, as it did in
the 1970's.
?
Rampant protectionism could also breed social and political
instability and, ultimately, bring nations into conflict. Political
instability would put all the gains of the past quarter century at
risk. The unintended consequences of protectionism would be harmful
for people living in developed countries; they would be a tragedy
for the world's three billion poor people.
We can choose a better course. Although we cannot entirely
eliminate calls for protectionism, there are things we can do to
retard its growth and mitigate its harmful effects. Here are a few
ideas:
Policies to reduce frictions include training, education and
relocation assistance for people experiencing change due to rapid
global growth.
An education system that gives people the tools to adapt to
change by emphasizing problem solving over rote learning will
reduce turbulence.
Labor market policies that make it easy for companies and
workers to change the nature of the work they do will reduce
turbulence.
Policies that increase people's overall sense of security, such
as reducing corruption, predictable rule of law, and a healthy
environment with clean air and water, will reduce friction and
turbulence.
A stable monetary environment with a predictable price level and
a moderate, predictable tax system will reduce turbulence. I
strongly urge China's leaders to resist pressure from the American
government to revalue the RMB. A stable RMB will keep China's
prices stable, deter speculation, promote increased FDI and
sustainable growth.
The reason we care about protectionism is its impact on the
lives of families trying to feed, educate, and care for their
children to give them a better future. Protectionism attempts to
stop change. But change is inevitable. It is a better use of
resources to prepare people for change by giving them a stable
society with a growing economy and by forward-looking education
that gives people the skills and flexibility they will need for the
jobs of tomorrow's global economy.
Dr John Rutledge is a leading economist who has advised
several presidents, including the current administration, as well
as multinational corporations and financial institutions.
(China Daily August 3, 2007)
