Rethinking Protectionism and Reciprocal Trade Policy

Cato Institute scholar (and coauthor) Dan Ikenson has a new paper out this week that examines whether globalization - in particular the interconnectedness created by modern investment patterns and global supply chains - has rendered protectionism and reciprocal, tit-for-tat trade policy obsolete.  (By "obsolete protectionism," of course, I mean "utterly ineffective in protecting domestic jobs and production," not "ineffective as a political tool to scare-up votes" (see, e.g., Schumer, Chuck).)

Dan and I grazed this subject in our paper when we said, among other things, "The fact is that U.S. labor and Chinese labor are better characterized as complements in a transnational production supply chain rather than competing substitutes in a zero-sum world.  That is a relatively new reality of international commerce that trade policy, trade negotiations, and too many trade commentators have yet to fully grasp."  I also rubbed up against the issue when I noted how Ford Motor Company was ripping seats out of its imported vans in order to secure preferential tariff access and proclaimed that "protectionists play Atari 2600 while the world now plays Wii."

Well, Ikenson's new paper takes a much deeper look at the relatively new phenomena of foreign investment and integrated supply chains and their impact on not only old school protectionism, but also classic trade negotiations based on reciprocal market-opening "concessions":

During the past few decades, a truly global division of labor has emerged, presenting opportunities for specialization, collaboration, and exchange on scales once unimaginable. The confluence of falling trade and investment barriers, revolutions in communications and transportation, the opening of China to the West, the collapse of communism, and the disintegration of Cold War political barriers has spawned a highly integrated global economy with vast potential to produce greater wealth and higher living standards.

The factory floor is no longer contained within four walls and one roof. Instead, it spans the globe through a continuum of production and supply chains, allowing lead firms to optimize investment and output decisions by matching production, assembly, and other functions to the locations best suited for those activities. Because of foreign direct investment, joint ventures, and other equity-sharing arrangements, quite often "we" are "they" and "they" are "we." And because of the proliferation of disaggregated, transnational production and supply chains, "we" and "they" often collaborate in the same endeavor. In the 21st century, competition is more likely to occur between entities that defy national identification because they are truly international in their operations, creating products and services from value-added activities in multiple countries. There is competition between supply chains, but only after there is cooperation and collaboration within supply chains.

But trade and investment policy has not kept pace with these remarkable changes in commercial reality. Our globally integrated economy requires policies that are welcoming of imports and foreign investment and that minimize regulations or administrative frictions based on misconceptions about some vague or ill-defined "national interest." To nurture the promise of our highly integrated global economy, governments should commit to policies that reduce frictions throughout the supply chain–from product conception to consumption–as well as in the flow of services, investment, and human capital.

There's plenty more of that great food for thought in Dan's paper, so go read the whole thing here.

One final note: once you understand the cool phenomena that Dan lays out, you're going to start noticing that instances of globalization confounding protectionist shenanigans have become very common.  For example - and not to pile on Senator Schumer (although it's often hard to resist) - the Peterson Institute's Jacob Funk Kirkegaard noticed last month that the good Senator received quite the smackdown by today's economic realities when he tried to protest a Texas wind energy project that used Chinese turbines paid for by Stimulus* dollars:

The issue of from where and when the government assistance comes in, Senator Schumer seems a little astray on his fixation with China.

The turbine in question—A-Power’s 2.5 megawatt turbine—is German technology, not Chinese, produced by the German company Fuhrländer, from which A-Power licensed it in 2007. The wonders of globalization make it even more complicated than that. In March, A-Power entered into another joint venture, that one 75 percent owned by none other than the US company GE Drivetrain, to operate a wind turbine gearbox assembly and testing plant in Shengyang.

Therefore, the gearboxes going into A-Power’s Chinese-made turbines that are heading to Texas will be produced by an entity majority-owned by the US corporation GE Transportation and hence US technology.

Such economic revelations make Schumer's simplistic jingoism seem downright silly.  However, I must admit that I feel a tad sorry for the Senator and other antiquated politicians like him.  I mean, it must be really tough on them when one of their go-to political moves becomes totally obsolete and often self-defeating.

(Ok, ok, I don't feel sorry for them.)