Protectionist Dangers Growing

Ambrose Evans-Pritchard covers Davos. The key point to understand in all the protectionist discussion is that unlike in 1930, when the U.S. was a trade surplus nation, it is now a trade deficit nation. That means an end to trade means higher costs, but also higher wages and more jobs. Structurally, every economy will be worse off without free trade, but American workers will benefit at the expense of workers in exporting nations—in the short-run.

Below are a selection of quotes from the article, which highlights the growing danger. While this rhetoric was mostly behind closed doors, if it becomes public (not these quotes, but rhetoric for public consumption), all bets are off, and that goes double for America. Many conservatives (here I would lump the Buchanan wing with union Democrats) already favor some trade restrictions. They have lost to the internationalists (libertarian leaning conservatives and liberals) for the better part of two decades. Under Bush, however, the Republicans became slightly more anti-international, due to a backlash to the backlash against American efforts against terrorism. Liberals were very pro-international out of their opposition to Bush. Liberals tend to be more politically pragmatic though. If Obama is attacked on the international stage, he will defend America, and liberals might bash foreigners. If that happens, the only ones left to defend free trade will be the libertarians and economists, who are nowhere near a majority.

In each quote, Ambrose provides the likely American retort:

Mr Geithner's bluntness prompted an angry outburst by Chinese premier Wen Jiabao behind closed doors in Davos. Mr Wen later let rip against "blind pursuit of profit" and unstable economic models based on "low savings and high consumption". Not a word about China's role in accumulating $1.9 trillion of reserves and thereby helping to stoke a global credit bubble; Mr Wen clings to the fallacy that greedy banks alone created this disaster. A fat lot of good it will do him.

"They can print the dollars," said a weary Ernesto Zedillo, Mexico's former president. The injustice of it. The arch-sinner is dodging its own disaster, leaving scores of well-behaved countries starved of capital and exposed to the crunch from Hell.

Russia's Vladimir Putin railed wildly, calling for a global putsch to topple the dollar. "The one reserve currency has become a danger to the world economy," he railed. Kremlin aides hovered in the foyers, accusing the US of running a "beggar-thy-neighbour" policy. "All the free liquidity in the world will run into American Treasury bills. That is pretty selfish," said one.

Herman Gref, former economy minister and now Sberbank chief, said the world should seize control of the Fed itself to force it to serve global needs. "Economies are facing collapse just because dollar credit has been withdrawn. That cannot be," he said.

China, India, and Russia were among the loudest in Davos, though all three have already taken steps to protect their own steel mills. Germany's Angela Merkel spoke darkly of "command economy experiments", and slammed US car-bail as a trade "distortion", even as she crafts a clever version for German cars.

Gordon Brown says we all face ruin if we "let the protectionists take over", yet UK banks under the state's thumb are being told to cut foreign lending. France's Christine Lagarde says – with refreshing candour – that protectionism has become a "necessary evil".