Sunday, March 2, 2008

The Conundrum of Protectionism

The Conundrum of Protectionism

I’m not a big fan of protectionism but I am a big fan of fair play and I’m a big fan of my fellow Americans.  This is why I actually believe protecting jobs in America that shouldn’t be protected harms people more than it helps and at the end of the day makes our nation weaker not stronger.  The best example of this is the auto industry which has fallen on hard times over the past two decades.  Even while losing market share in part to uncompetitive costs auto unions fought for more money and greater concessions.  Of course a fair amount of blame for the downfall of the mighty US automobile companies has to go to auto executives that took the consumer for granted and have yet to be able to get back into their good graces.  Car buyers are sophisticated and most will not simply “buy American” they need a lot more (hint: make better products). 

That brings us to the current run for the White House and the surge in populist politics.  It sounds great when a politicians claims they can pull strings and erect barriers that protect jobs.  The scary part or flip side is that in a global economy pulling those strings and erecting barriers means protectionism.  Just as the rest of the world is getting richer we are on the cusp of creating a retaliatory environment that would make them not purchase our goods and services.  Never in the history of the United States has our nation needed commerce with the rest of the world.  Our trade deficit is at record levels and recently our largest investment banking firms have openly courted and accepted money from overseas investors.  Still, the message that is resonating in Peoria is that free markets only benefit the rest of the world at the expense of American jobs.

The steamroller is already in fifth gear and protectionism will be at the top of the list in the general election.  It is the ultimate combination of fear and bribery which are simply too much to resist with unemployment rising, home prices declining and consumer confidence plunging.  Playing on fear further economic slowing and promising jobs even those that have been eroding in the rust belt will garner votes.  Heading into the new week there are a couple of news items for those pushing protectionism to consider.  A huge military contract goes abroad and the Oracle of Omaha commits on sovereign wealth funds.  Neither of these news items helps protectionists. 

EADS a European defense contractor joined with Northrop Grumman to win a $35.0 billion contract from the US Air Force.  The deal ends Boeing’s 50 year relationship to build refueling tankers.  Immediately management from Boeing began barking about sending this kind of contract off US shores.  I must admit it is a tough pill to swallow.  This is a gigantic financial deal and it doesn’t feel good.  I though the military like police departments could or would only buy American.  The headline plays right to the heart of the Democrat campaigners of the White House as it will result in the lost of great middle class jobs.  The untold story will be why this actually happened in the first place.  In a statement Air Force General Duncan J. McNabb said the KC-45A refueling tanker “will revolutionize our ability to employ tankers and will ensure the Air Force’s future ability to provide our nation with truly global vigilance, reach and power.

Republican Representative Todd Tiahrt whose Kansas district houses the facilities where the Boeing refueling tankers would have been built fumed while uttering: “An American tanker should be built by an American company with American workers.”  This is true unless the rival product is superior.  Then we have to ask ourselves if the American military should have inferior equipment simply in the name of job creation.  Is it really patriotic to not give the US Air Force the best equipment possible?  My real concern is what happened at Boeing.  Did they take their position for granted, did they take their Americanism for granted.  Did they forget to read the history of the American automobile makers?  It is sad, it is complicated, but it is also reality, too.

“Then there are comments from Warren Buffett on sovereign wealth funds.  “There’s been much talk recently of sovereign wealth funds and how they are buying large pieces of American businesses.  This is our doing, not some nefarious plot by foreign governments.  Our trade guarantees massive foreign investment on the U.S. When we force-feed $2.0 billion daily to the rest of the world, they must invest in something here.  Why should we complain when they choose stocks over bonds?”

-Warren Buffett in annual newsletter to investors

I understand the instinctive angst over bits of American assets going to owners in different countries but how can we stop this from occurring.  Why would we want to stop this from happening?  We’ve been buying assets abroad for years.  At this point the people that should really be angry are those sovereign wealth funds that are getting crushed with their recent investments. Stopping the flow of investments into the US and stopping the flow of cheaper items that greatly enhance the middle classes ability to live the good life is at stake and I just don’t think most folks get it.  Taking US corporations for making too much money is nonsense.  Its is already clear these companies need to be more aggressive and allowed greater financial freedom to compete or find them in the same position as Boeing finds itself in this week.

Fight the urge to erect walls and stop free trade; it’s a one way street to complete economic disaster.

Charles Payne