To Increase Impact of Stimulus Efforts, Keep Trade Open
Michael R. Czinkota
For The Bali Times
WASHINGTON ~ The US is preparing the largest economic stimulus measure ever invoked by any nation. The House has already passed one version; the Senate is now beginning its considerations. We know that there is no perfection. When more than $850 billion are to be allocated, there is bound to be controversy about who gets what. There may even be some inefficiency and waste in these expenditures. After all, we’re only human. But great care needs to be taken not to trigger an avalanche of global protectionism which reduces the effectiveness of economic support.
The policy objective is to find ways to jumpstart the US economy. The accepted consensus has already leaded to the expenditure of large amounts of government money in support of special economic sectors. So far, the banking, insurance and automotive industries have been the ones benefiting most from subsidies. However, the market response has been insufficient. Therefore, the plan is to spend more so that the economy can fire on more of its cylinders. The expenditures will eventually far exceed a trillion dollars.
Trying to spend one’s way from the abyss of a depression, will extract a long term price. For example, there will be higher taxes. While upper level income earners will be particularly asked to contribute, the tax burden will eventually also weigh on the much more numerous middle class. There will be, over time, a substantial inflationary effect, which will depreciate retirements and savings. Sooner or later, the value of the US currency will be depreciated, leading to adjustments in the cost and quantity of trade. These effects are recognized and we appear to accept them in exchange for a soft landing of our economic hopes and dreams, rather than a hard crash.
However, the “Buy American” mandate in the package weakens the effect of the stimulus and places exporters globally at risk. With apparent logical consistency it is argued that the purpose of a domestic stimulus measure is to save and create domestic jobs. Therefore, the funding should support only domestic industries. Foreign companies and products should not be benefiting from a domestic stimulus.
Though facile, this logic suffers from some major fallacies: First, a preference for domestic products at any price will lead to reduced domestic competitiveness and higher prices. Such effects are neither small nor temporary. Domestic legislation cannot reverse the globalization of economies which has taken place. The decades of efforts which have turned most countries into low barrier economies have enabled the US to become one of the leading export powers. It took much pounding and many adjustments to get there. I remember persistent negotiations with the Japanese government to change its legislation which restricted the building of large grocery stores. We did so, because mom and pop stores were much less likely to purchase and carry imported products. Negotiations were also focused on the establishment of fair standards so that firms could have an opportunity to enter into markets and make their mark. The outcome did not always satisfy everyone (for example US efforts to open global markets for wood expo
rts mainly helped Canadian producers), but at least firms had the opportunity to compete abroad.
Throughout the decades of tearing down international barriers, research clearly informed us about the ‘burden of foreignness’. Outsiders typically are at a disadvantage since they don’t have the contacts, the social positioning, and the understanding of a market enjoyed by domestic firms. They have to bridge the distance between markets. They also suffer from domestic decision makers considering their customary suppliers first, and doing the deal with the neighbor and friend from college. That’s how it is and how it should be. Context matters!
However, legislation which eliminates competition and encourages wasteful expenditures will decrease resources. Just because a legal provision does not require any financial allocation, does not make it free of costs. Legislators should know that in its consequence, a “Buy American” provision would, in its consequences, cost the US and the world billions of dollars and reduce the number of jobs.
If outsiders can overcome their burden of foreignness, and, in spite of it, offer lower prices at the same or better higher level, they should be eligible for a contract. Doing so will avoid the re-emergence of a new competition in trade restrictions. Monies will also be spent more efficiently, letting the stimulus measures go further and accomplish more.
When a firm ventures abroad it is an outsider in other nations. The reception it receives there will be driven by the openness offered by its own home nation. Every time a US exporter is losing business abroad in retaliation for domestic restrictions, the effect of the stimulus on the economy is reduced. Valuing domestically made products highly is good. Using this appreciation to erect barriers would be a major sacrifice at the altar of protectionism, which sharply reduces the effect of an economic stimulus.
Michael Czinkota researches international marketing issues at Georgetown University and the University of Birmingham in the U.K. He served in trade policy positions in the Bush and Reagan Administrations. He can be reached at email@example.com.Filed under: Opinion