Bang the Doldrums (of Protectionism)

Our federal government has banged its booming drum today, delivering a baffling decree heading into what's an otherwise blissful spring weekend.

Our federal government has banged its booming drum today, delivering a baffling decree heading into what's an otherwise blissful spring weekend. Trade sanctions on China have been imposed, and this mournful fact was likely the predominant reason equity markets turned lower in intraday trading. The issue, a paltry dispute over paper goods, is seemingly minor. But we can't help but wonder: could this be opening the door to increased tariffs in a number of industries?

The Bush administration said it's using the economic sanctions against China to "protect American paper producers from unfair Chinese government subsidies." This political game reverses over 23 years of US trade policy that formerly treated China in a similar way to other US trading partners as it pertains to government subsidies. Formerly, the feds maintained that American companies don't have a right to challenge subsidies granted to their foreign competitors if those companies were in "non-market economies" like China. The official explanation is that China is no longer a "non-market" economy, and therefore doesn't deserve these considerations.

1. Commerce Department Applies New Duties Against China
By Mark Drajem, Bloomberg
2. U.S. Plans Economic Sanctions on China
By Martin Crutsinger

Why the sudden change of heart? We can't be sure, but it occurs to us this move is about fear and politics. In politics, fear rules—and the world is being fed a healthy dose of dread lately about China's rapid development. These fears are irrational. The truth is China is integrating itself into the global free market economy at a rapid clip—the financial infrastructure is building, property rights are budding, and foreign commerce is burgeoning. That China is still developing and making strides toward becoming more like the free, developed world is something to applaud and encourage.

China's Great Game in Asia
By Editorial Staff, The Economist

Yet, public fear of China persists. (We often wonder what exactly the fear is. Being a prosperous and productive nation? Having billions of people raise themselves out of poverty? Helping provide more and better goods and services to the world through free trade?) And the twin reactionary sibling to fear is bigger government.

So says the sage words of Steve Chapman: "If we have learned anything from the failures of socialism and the achievements of capitalism, it's that if you want to protect consumers, relying on the wisdom and benevolence of government is not the way to do it."

The Government's Iron Fist Is Not the Consumer's Friend
By Steve Chapman, Chicago Tribune via RealClearPolitics

This whole event stinks of isolationism and socialism (the arch enemies of globalization and capitalism). And while the markets barely treaded water today, guess who lauded the new sanctions: "Officials at the United Steel Workers union, which represents many of the workers at US paper plants, hailed the administration's decision, saying it would help protect jobs for workers at 22 paper mills in 13 states who produce the glossy paper being covered by the sanction." Without question, unions have diminished in power over time, but their political clout persists. We wonder if these sanctions were something of a concession by the Bush administration to the Democrats' renewed Congressional power.

Labor Unions for America . . . or the World?
By Doug Bandow, TCS Daily

The new trade sanctions are a bad development for stocks and for the global economy. However, at this junction it's a relatively minor event and might just be political pandering. The question going forward: have we seen an isolated incident, or has the government banged the grim doldrums of protectionism with a new precedent?

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.