When the self-proclaimed
"conscience of liberal America" and a one-time free trader
to boot starts arguing for protectionism, you know that things have
come to a pretty pass. But that’s what’s happened over the past
a Nobel Prize-winning economist, has taken to advocating a 25 per
cent "surcharge" – he refuses to use the more descriptive
term of "import tariff" – on goods from China as
a way of bringing the Chinese leadership to heel over currency reform.
So potentially dangerous and out of character is this idea that
when I first read it, I assumed he was being ironic. But sometimes
the cleverest of people can also be the most stupid, and he’s now
said it so often that you have to believe he’s serious.
What he’s advocating
is trade retaliation so extreme that it would make the 1930s look
like a stroll in the park. Contrary to Professor Krugman’s naïve
assumption that the Chinese would soon cave in and allow their currency
to float if confronted by such hard-ball tactics, I am certain that
nothing is more guaranteed to produce the opposite response.
suggestion mines a rich seam of populist US thinking and rhetoric
which grows ever more vocal and worrying as the recession persists.
What makes Krugman and other highly regarded economists who toe
the same line so dangerous is that they give intellectual respectability
to a fundamentally disreputable idea.
America doesn’t really do free-traders. Even progressives, though
they may pretend otherwise, are protectionists at heart. And there
is a good reason for it. The US is still a largely internalised,
self-reliant economy for which trade with the outside world is relatively
unimportant. Many Americans have long thought they don’t much benefit
from globalisation and that they would be better off behind high,
protectionist walls. When times are tough, these arguments find
ever more traction.
I don’t want
to be unfair on Professor Krugman, for he proposes tariffs only
as retaliation against China for supposedly manipulating currency
markets to gain unfair competitive advantage. The evidence is admittedly
overwhelming, and if next month’s biannual currency report by the
US Treasury were to set all diplomatic considerations aside, it
would undoubtedly find China guilty of manipulation.
In the good
times, the mercantilism of Chinese currency intervention was grudgingly
tolerated. In return for carrying big current account deficits,
America got cheap goods and cheap money. But now, with the advent
of the Great Recession, the arrangement looks far from mutually
beneficial. The US, it is argued, cannot forever be expected to
keep accumulating debt to spend on other countries’ exports. It’s
got to stop.