Article Series
The Arctic Cold War Looming
The Uranium Merger Mania Pending
The Paradigm Behind Global Trade Protectionism
The Stealth Rally in Mining Mergers
Special Memorial Day Weekend Report
Special Report
The Paradigm Shift of Sky-High Oil
The True Paradigm behind Global Trade Protectionism
By George Bell
The recent World Trade Organization global trade talks failed, a truly sad event for the citizens of the world...
Another year, another international trade policy breakdown. In the "Doha round" of World Trade Organization (WTO) this week, ministers and officials from around the world left empty handed, as the meeting failed to produce any new policies in regard to global trade. Sadly, the lack of compromise means the world will face "business as usual" over the coming year, something that could keep agricultural inflation through the roof.
The Big Bombshell
At the end of the day, the world suffers when countries instate protective policies that block the lines of free trade. And for the past six years, the aforementioned has been exactly the case, since the last big global trade deal was hashed out in November of 2001, with the Doha Development Agenda.
Looking back over the past six years, we've seen global GDP growth contract, food and oil prices rip through the roof and the U.S. dollar spiral downward through the floor. Clearly, the Doha Development Agenda and the protective trade policies of the world are not working.
Is free trade good for the world? Yes and as the World Trade Organization pointed out in the World Trade Report 2008 this July, the "gains-from-free-trade theorem" shows countries that trade are generally better off than refraining from such. What's more, if a country exercises it's comparative advantage (meaning that it focuses on exporting what it has greater resources for, or is better at producing than others), it will also benefit. In other words, Saudi Arabia is probably smart to focus on oil, over horseradish.
However, when countries begin instating protectionist policies that hinder the global flow of goods, everyone suffers. Here are a few examples:
The United States presently has a 54-cent per gallon tariff on Brazilian sugarcane ethanol, while also providing U.S. corn producers (for ethanol) a 51-cent subsidy. The funny thing is that sugarcane ethanol is actually a cheaper, more efficient fuel. Corn ethanol actually makes your car get worse gas mileage, not better. However, in America's pursuit to become "energy independent", it has positioned itself as the world's largest producer and consumer of ethanol. But the problem is that by heavily coveting corn ethanol, the event is really just removing food from the food chain and helping to fuel global agricultural inflation. The ethanol debacle is just one small piece to the larger global protectionist trade policy problem, but is shining example of how such protectionism isn't really in place to help the common man/consumer. Rather, protectionist trade policy usually only truly aides big businesses within whatever industry the policies cover.
America isn't the only culprit in protectionist policies though; the larger bombshell is that of the combined defensive trade mentality of the world.
The Lies behind Protectionism
When evaluating the larger problem, it's important to understand why defensive trade policy exists whatsoever. Foremost, the protectionist mentality believes that by instating tariffs against foreign products, a country is guarding its domestic industries by ensuring that goods from other countries (specifically where they are produced cheaper) are less competitive. Protectionist though holds that instating the policies, jobs within a country remain relatively secured, while also ensuring that the country does not become dependent on another for whatever that product may be. What's more, the protectionist mind believes a country could weaken its economic position, if it is to abolish protective policies, while other countries do not. Really, it's a child's game of tit-for-tat.
In the April, 2006 article Protectionism - Tariffs, Subsidies, and Trade Policy on Globalenvison.org, author Stephen Spruiell did a great job explaining why protectionism really only hurts a country in the end. In Spruiell's article he gives the example of a hubcap factory. Imagine an American hubcap company begins buying Bra Protectionism - Tariffs, Subsidies, and Trade Policy Brazilian steel, over that of the U.S., because it is cheaper, even with shipping costs. Now, imagine that lobbyists for the steel industry go to the Government and argue that the cheaper steel from Brazil is causing the domestic industry to suffer and that American jobs could be in jeopardy if something is not done. The Government reacts, placing a 30 percent tariff on steel, thus "making the Brazilian steels 10 percent more expensive."
Consequently, the hubcap factory then finds itself paying 20% more for its core building material: steel. The problem is the hubcap company then has to raise prices to compensate for higher steel costs. Moreover, because consumers have the ability to buy goods worldwide, they begin ordering directly from Japan, which can make rims cheaper, without the artificially propped up steel prices American manufacturers face. The conclusion to Spruiell's story is one where the American hubcap manufacturer must then lay off workers, but really, will likely eventually completely go out of business. Spruiell says, "In all seriousness, this is precisely what happened to many manufacturers when President Bush imposed new steel tariffs in March of 2002."
Overall, the protectionist argument fails at every turn and is nothing more than smoke and mirrors for a particular industry paying Government to ensure its success, even if it means millions of people outside that particular industry are hurt. Protectionism amounts to nothing more than greed and selfishness at its very core.
With all that we've covered here, I hope the message that you take away is that the WTO trade talks grinding to a halt this week, do not help the average Joe around the world whatsoever. Whenever there is protectionism in place, you can almost always count on paying higher prices for goods worldwide. And in the present agricultural inflationary environment -- with overall slowing global GDP growth -- leaders who truly care about their people -- and the rest of the world -- should understand how absolutely vital a paradigm shift in protectionist thought is for all of the citizens of the earth, not just the bottom lines of big business.
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