'Fair Trade' Lifts the Wrong Boats

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Whom does protectionism really protect? Too often, it protects the weakest competitors–while allowing them to get weaker. In a Darwinian way, protectionism also benefits the very people you're trying to protect yourself against. By making it harder for the threatening firms or nations to compete on your home turf, it forces them to adapt to a tough environment, which makes them even tougher. And if the dikes ever fall and protections disappear, the adapters thrive while the pampered perish.

Doubt it? Look at the U.S. auto industry. Ford and General Motors had every advantage 25 years ago, with a virtually captive market between the Atlantic and the Pacific. Several doses of protectionism–the Buy America Act, emissions rules that heavily favored Detroit, political Japan-bashing–should have cemented Detroit's home-field advantage.

So what happened? The Japanese built the most efficient plants in the world, studied the American consumer relentlessly, and sold cars wherever they could get a toehold. Today, Toyota, Honda, and Nissan control a quarter of the U.S. market and make lots of money, while Ford and GM lose billions and struggle to build competitive products.

The U.S. textile industry is another sad case study. For years, garment manufacturers benefited from quotas and tariffs that kept cheaper imports out. One by one, those protections have been expiring–and one by one, U.S. textile firms are going under. The loss of jobs is a serious problem. But here's something more insidious: Artificially propping up those industries in the first place probably lured workers who otherwise might have gotten more training and climbed higher up the skill chain. "Many of those jobs had been there a long time," says James Barth, senior finance fellow at the Milken Institute in Los Angeles. "A lot of those people said, 'Well, if it was good enough for my parents, it's good enough for me.' That probably diverted a lot of people who might have gone to college."

Is this the kind of dumbing down Democrats have in mind when they take over both houses of Congress in January? There's certainly a "keep the bums out" mentality toward immigration, offshoring, and free trade. Many victorious Democrats railed against free trade in their campaigns and are now promising "fair trade instead of free trade," a euphemism for propping up home industries that can't compete on their own. The specter of greedy CEOs has helped prime the issue. Even the lame-duck Republican Congress seems to feel the nativist vibe, scuttling a free-trade pact with the hugely menacing exporter Vietnam. Treasury Secretary Henry Paulson called such impulses "morally wrong."

There are some legitimate problems facing the middle and working classes that everybody should acknowledge: The minimum wage in the United States probably is too low. Globalization does force people out of their jobs. Healthcare is too expensive. Income inequality is getting worse–not better, as it should in a healthy society.

And nobody has found solutions. Protectionism hasn't protected the most vulnerable–but laissez-faire globalization isn't about to lift their boats either. I've made it a habit, when I interview top American executives, to ask about a typical 50-year-old assembly line worker who's worried that his job is going to get shipped overseas. What should he do with his life? The usual response–get retrained–is far too facile. When I pressed Dave Swift, president of Whirlpool, on this recently, he acknowledged, "It's hard to get people to be retrained till they're faced with not having a job."

Any big companies doing much about that? Few that I'm aware of. But there are some ideas. One I like comes from former information-technology executive Vivek Paul, who now works for Texas Pacific Group, a big private-equity firm. Paul, who is from India, proposes a "safety net" developed by companies themselves that will help workers bridge the dislocation often caused when jobs get moved to lower-cost countries. Part of the savings from such moves, he says, could be used to fund insurance for those who might be affected, until they're back on their feet. "We have to be hard-headed about this," he adds, "but we can be tender-hearted, too."

It's an enchanting idea: corporate America offering a real lifeline–not just token retraining–to the people ground up in the hunt for global efficiency. That might even pre-empt protectionist politicians eager to gorge themselves on corporate bullies and allow well-run companies to keep seeking the best sources of labor and innovations from around the globe.

But I won't hold my breath. What will probably happen instead–and is already happening, in fact–is the usual militant standoff in Washington. Emboldened Democrats will seek the instant gratification of bashing China and India and the Dominican Republic and coming up with fresh ways to stick up for the little guy by keeping cheap products out. Corporate interests and their lobbyists will spend every dime they have to logroll and make sure as little as possible happens. The real protectionism will be aimed at the CEOs and politicians already in power. The rest of us, we're on our own.

--Rick Newman

TAGS:
car manufacturers
international trade
  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at rnewman@usnews.com.

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