Republicans have now joined Democrats in thinking foreign trade has been bad for America, and much mischief could lie ahead as a result in the coming years.

The WSJ reports that, according to a new NBC/WSJ poll, free trade has lost its appeal to Republicans as well as Democrats:

By a nearly two-to-one margin, Republican voters believe free trade is bad for the U.S. economy, a shift in opinion that mirrors Democratic views and suggests trade deals could face high hurdles under a new president….In a December 1999 Wall Street Journal-NBC poll, 37% of Republicans said trade deals had helped the U.S. and 31% said they had hurt, while 26% said they made no difference…

The leading Republican candidates are still trying to promote free trade. “Our philosophy has to be not how many protectionist measures can we put in place, but how do we invent new things to sell” abroad, former New York City Mayor Rudy Giuliani said in a recent interview. “That’s the view of the future. What [protectionists] are trying to do is lock in the inadequacies of the past.”

Such a stance is sure to face a challenge in the 2008 general election. Though President Bill Clinton famously steered the Democratic Party toward a less-protectionist bent and promoted the North American Free Trade Agreement, his wife and the current Democratic front-runner, Hillary Rodham Clinton, has adopted more skeptical rhetoric. Mrs. Clinton has come out against a U.S. trade deal with South Korea.

Other leading Democrats have been harshly critical of trade expansion, pleasing their party’s labor-union backers. In a March 2007 WSJ/NBC poll, before recent scandals involving tainted imports, 54% of Democratic voters said free-trade agreements have hurt the U.S., compared with 21% who said they have helped.

These sentiments are a mixed blessing. On the one hand, the US must get its current account deficit under control, as is increasingly evident to anyone who cares to look. A dramatic reform in energy policy would be a good place to start. On the other hand, abrupt protectionist measures to severely limit imports, or policies that would prohibit foreign purchases of US assets, including stocks, debt, real estate and companies, could be a disaster in the making.

The US Tariff Act of 1930, popularly known as Smoot-Hawley, was widely credited with bringing on or making the Great Depression even Greater. It certainly exacerbated the credit crunch that was at the heart of the panic. Further, it had the foolish oddity that its tariffs were stated in dollars rather than percentages, making the effect of the tariff worse as prices declined during that period.

However, what is of note in 2007 is that the US economy in 1930 had relatively few exports and imports compared to today. There was no trade deficit in 1930, and imports and exports each were less than 5% of GDP. By contrast, today the US economy is running a current account deficit of almost a trillion dollars, and imports are around $2 trillion, around 15% of GDP. Exports are around 11% of GDP. The stakes are much greater in tariffs and other goods and capital restrictions in 2007 than could have been even imagined at the time of Smoot-Hawley.

There are already moves afoot to limit imports from China, the second largest source of US imports, at about $300 billion. We are not here to debate today the merits of taking this or that action on imports from China, the country that provides 5000 of 6000 Wal-Mart suppliers. Rather, we note that China already has $1.4 trillion in foreign exchange reserves from past exports, and that the typical means of recycling such surpluses has been to purchase goods or assets in the importing country. Efforts to stop this normal economic process run into problems with the laws of arithmetic: if you buy from a man and use dollars to do so but then tell that man he can’t spend his dollars you wind up with problems — something’s got to give. As we have said, you can’t have it both ways in the world of international trade and the calculation of GDP.

The NBC/WSJ poll of Republicans would appear to indicate that some changes in trade policy may be on the horizon, since apparently a majority of Democrats already favor restrictions. Unless these issues are approached with some historical knowledge and careful consideration of the intended (and unintended) consequences, much mischief could lie ahead.

This entry was posted on Thursday, October 4th, 2007 at 6:51 am and is filed under China, Democrats, General, Republicans, business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.