Tuesday, September 22, 2009

Protectionists Cling To Their Atari 2600s While The Rest Of The World Plays Wii

There's a fantastic op-ed in today's Korea Times by Cato Institute expert (and co-author) Dan Ikenson and the International Policy Network's Alec van Gelder on the archaic folly that is protectionism in today's globalized economy.  In the piece, Ikenson and van Gelder use examples of actual multinational manufacturing processes to inform G20 leaders on why protectionism is nonsensical in an era of global supply chains (read the whole thing here):

...  To quell the anger and gain a constructive focus in Pittsburgh, leaders must recognize how outdated it is to view the world in terms of ``us" versus ``them." A crash course on the global economy is in order.

The largest "American" steel producer is the majority-Indian-owned Arcelor-Mittal, which has headquarters in Luxembourg and Hong Kong, and is listed on the New York Stock Exchange and five European stock exchanges.

The largest "German" producer, Thyssen-Krupp, a conglomerate with 670 companies worldwide, is investing $3.7 billion in a carbon and stainless steel factory in Alabama, which will create 2,700 permanent jobs there.

California's steel industry consists almost entirely of rolling mill operations that process imported carbon steel slabs from Brazil, Russia and other countries.

The Californian finished products are disqualified from President Obama's Buy American procurement rules for failing to meet the statutory definition of American-made steel. This illustrates the impossibility, futility and harm of attempting to define producers by national characteristics.

Today, the factory floor is no longer contained within four walls, one roof and national borders. Instead, the factory floor spans the globe, allowing firms to optimize investment and output decisions by matching production, assembly and other functions to the locations best suited for those activities.

Nokia is a Finnish brand but produces most of its components and performs most of its assembly in other countries.

Lenovo is a worldwide Chinese computer brand, but it maintains headquarters in Singapore and the U.S., operates research centres in the U.S. and Japan, and assembles products in India, Mexico, Poland and China.

Apple's ubiquitous iPods are designed in labs in California then assembled in China, drawing on labor and components from South Korea, Taiwan, Singapore and Japan.

This is true not only for big business but many of the goods now considered essential to our daily lives ― from roses to screws to coffee. ...

This global factory has changed the old ``us versus them" characterization of international trade for good ― and for the good.

Trade is increasingly the process of importing a good, adding value to it, and then exporting it to another producer further down the production chain. These complicated production and supply chains rely upon the rapid flow of goods and services across borders....

Banning containerized shipping (perhaps the most important technique in 20th-century trade) or broadband Internet connections (which have paved the way for millions of call-center jobs) would clearly be ridiculed.

Yet, it is equally ludicrous for governments to promote ``temporary" tariffs to shelter ``domestic" industries, or subsidies for ``local" producers, or ``environmental" regulations that would hobble foreign competitors.

World leaders need to understand this in time for Pittsburgh. The only real stimulus the global economy needs is to continue the reforms that have guided the past 30 years of unprecedented global expansion: reduce trade barriers and remove the regulations and administrative burdens that prevent people from maximizing their potential in the global economy.
Gone are the days when the United States could "punish" another country or "help" an American company by slapping tariffs on foreign imports.  To put it simply: now that everything is made everywhere, protectionism just doesn't make sense anymore (although one could reasonably argue that it never made sense, but that's an issue for another time).  Such senselessness was certainly evident in the President's recent decision to restrict Chinese tires under "Section 421" of US trade law.  Because most US tire producers also made tires in foreign countries (including China), the "protected" actually opposed the "protection." Crazy, huh?

Of course, even though protectionism has become archaic and pointless doesn't mean that it can't still be extremely costly.  Today's WSJ has a great piece highlighting these costs and the utter silliness of trade barriers in an age of "global factories."  In the article, the author describes the absolutely ridiculous (and expensive) lengths that Ford Motor Company goes through to avoid a decades-old 25% tariff on all imports of trucks and commercial vans entering the United States:
Several times a month, Transit Connect vans from a Ford Motor Co. factory in Turkey roll off a ship here shiny and new, rear side windows gleaming, back seats firmly bolted to the floor.

Their first stop in America is a low-slung, brick warehouse where those same windows, never squeegeed at a gas station, and seats, never touched by human backsides, are promptly ripped out.

The fabric is shredded, the steel parts are broken down, and everything is sent off along with the glass to be recycled. ...

The seats and windows are but dressing to help Ford navigate the wreckage of a 46-year-old trade spat. In the early 1960s, Europe put high tariffs on imported chicken, taking aim at rising U.S. sales to West Germany. President Johnson retaliated in 1963, in part by targeting German-made Volkswagens with a tax on imports of foreign-made trucks and commercial vans.

The 1960s went the way of love beads and sitar records, but the chicken tax never died. Europe still has a tariff on imports of U.S. chicken, and the U.S. still hits delivery vans imported from overseas with a 25% tariff. American companies have to pay, too, which puts Ford in the weird position of circumventing U.S. trade rules that for years have protected U.S. auto makers' market for trucks....
Foreign auto makers have long crossed swords with the chicken tax. Toyota Motor Corp., Nissan Motor Co. and Honda Motor Co. took the straightforward route and built plants in the U.S. ...

With the globalization of the auto industry, American companies have joined the game. Until recently, Chrysler Group LLC imported Dodge Sprinter vans made in Düsseldorf, Germany, by former owner Daimler AG. The engine, transmission, axles and wheels were removed, allowing the truck bodies to cross the border as auto components, which aren't subject to the tax. Daimler then reassembled the vehicles at a factory in Ladson, S.C....
The [Ford] vans leave Turkey on cargo ships owned by Wallenius Wilhelmsen Logistics. Once they arrive in Baltimore, they are driven into a warehouse, where 65 workers from the shipping company's WWL Vehicle Services Americas Inc. convert them into commercial vehicles amid the blare of rock music and the whirring of industrial fans.

On a recent afternoon, a handful of vans passed through the warehouse unmolested as passenger wagons. But the vast majority were lined up to have windows pulled out, and they all had their rear seats removed....

The story is a remarkable, and likely common, example of the perverse business decisions that multinational corporations make in order to provide consumers with the best and most affordable products possible - an absolute necessity in an increasingly competitive and global market for most products.  Unfortunately, it's also a prime example of the damage that protectionism inflicts upon US businesses and consumers, as well as the economy as a whole:
  • First, while these Ford trucks are no doubt cheaper because of the company's sneaky move to avoid the 25% tariff, they're also undoubtedly more expensive than they would be in the tariff's absence.  As such, American businesses must pay more for their (fitted-then-gutted) vans and trucks, and they pass these costs on to the consumer or absorb them, leaving less capital for expansion, investment and hiring.  As such, the truck tariff is a large, but mostly hidden, tax on US businesses and consumers.
  • Second, the 25% tariffs force a huge misallocation of finite resources, thus making both Ford and the overall US economy worse off.  Ford is wasting money, manpower, raw materials and energy in order to equip trucks with seats and windows and then gut them once they clear Customs.  It's not difficult to think of ways that Ford could better allocate these resources, to the benefit of the company, its shareholders and employees, and the overall American economy.
So to recap: in today's global economy, protectionism is simplistic, outdated and pointless.  It's the functional equivalent of playing Pong on a black-and-white TV (minus the retro-hipster coolness) while everyone else is playing Tiger Woods 10 on their 50" HDTV.

Only one very important difference, of course: protectionism is really, really expensive.

1 comment:

Kelsey R. said...

First of all, from one frustrated libertarian to another, I'm really enjoying this blog. It's nice to know there are people out there who aren't drinking the Kool-Aid of anti-trade rhetoric that has become so prevalent in mainstream media these days.

Which brings me to the reason for this comment: Mr. Ikenson and Mr. van Gelder have eloquently stated the argument against reactionary protectionism in their article, yet during the events of the past couple weeks that argument has been almost completely drowned out by crappy legal reasoning, followed by crappier economic reasoning, followed by swiftly changing the subject to healthcare reform. I fear the Obama administration is not going to treat the trade agenda as anything more than a political bargaining chip until the rhetoric of anti-globalization/anti-trade is adequately challenged in the media. However, aside from resources frequently viewed by the "trade nerd" community at large, I'm just not seeing this position being represented in a way the general public can easily consume/adopt.

So I guess what I'm suggesting, Scott, is that you create the next YouTube sensation by revising the lyrics to "Dick in a Box" or "I'm on a Boat" to inform the public of the staggeringly awful consequences of protectionist trade policy. Good luck, sir.