Thursday, February 11, 2010

The Perils of "Reciprocal" Trade Policy

A few days ago, I opined that the United States' use of "Buy American" protectionism as a negotiating crowbar to pry open Canada's own procurement market was a "very, very dangerous" move.  Little did I know that it was actually a precedent-setting event.  Here's Inside US Trade (subscription) with the depressing details:
Following a meeting with Mexican officials, U.S. Trade Representative Ron Kirk this week announced that he has offered Mexican officials to explore a reciprocal procurement deal by which Mexican firms would have access to U.S. government procurement contracts subject to Buy American provisions, provided that Mexico offers reciprocal access to U.S. firms.

This would be akin to an arrangement that the U.S. worked out with Canada last week, Kirk said in a Feb. 9 press conference following a two-day visit to Mexico with Deputy U.S. Trade Representative Miriam Sapiro.

He described the U.S.-Canada arrangement as reciprocal, giving U.S. businesses access to provincial procurement in exchange for Canadian firms bidding on procurement subject to Buy America provisions in the 37 states covered by the Government Procurement Agreement....

“We have committed to work with Mexico in a similar way [as Canada] if Mexico believes that is something that Mexican businesses are interested in pursuing,” Kirk said. “We would welcome the opportunity to have further dialogue and negotiations with the minister of economy to fashion the right program if Mexico so desires.”...
I've commented a few times about why "reciprocity" should not be the goal of free trade policies or trade negotiations, but it's mostly been in the context of "selling trade": the model reinforces the dangerous public misconception that imports are bad, because it - against all empirical evidence to the contrary - posits that our markets should be liberalized only if we get new export market access in return.

But the US-Canada and the US-Mexico negotiations also raise another serious problem with the "reciprocity model" - it implicitly justifies, and even advocates, protectionism.  In this case, we have the United States Trade Representative loudly trumpeting a blatantly protectionist measure - Buy American - because his team was able to use it to open Canada's procurement market, and now they're moving on to Mexico.  The logical extension of this policy is as simple as it is dead wrong: if this Buy American protectionism opened Canada's market, we should raise other barriers to foreign goods and services as a way to get other countries to give us market access!  Never mind that such barriers - as did Buy American - would punish US businesses and consumers and harm the US (and global) economy. And never mind that domestic liberalization benefits the economy regardless of what other countries do.  Nope.  We only open our markets when you open yours.  Ugh.

Of course, the absurdity of Kirk's "reciprocal protectionism" logic is easily exposed when one simply extends it to the Nth degree (Bastiat would be proud).  Just ask: Would the USTR ever advocate raising all US tariffs to their maximum allowable ("bound") rates under WTO rules as a way to then "negotiate" lower tariffs or other market access from our trading partners?  Just as with Buy American, the plan would be consistent with America's "international obligations."  And just like the US-Canada deal, those negotiations could result in "reciprocal arrangements."  But the new protectionist bargaining chips also would mean massive tax increases for American families, dramatic cost increases for American businesses, huge declines in foreign investment (as we commit economic suicide), and probable retaliation from our trading partners.  So USTR Kirk would never propose that.  He'd be laughed out of the room (unless that room was full of union leaders, of course).

And yet he justifies, and even praises, a little Buy American horse-trading because it's "reciprocal" and is now looking for other "reciprocal negotiations" with Mexico?  That's just silly.

As I said last week, "Buy American has been a complete debacle. It has stymied economic growth here at home and encouraged tit-for-tat protectionism abroad. To applaud anything but its complete dissolution is absurd, and to applaud its use as a tool in trade negotiations is very, very dangerous."

Unfortunately, it looks like that "danger" is also very, very real.

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