Bush should take his own advice on trade

Ground Floor: Amongst all the other issues on US president George Bush's mind at the moment is the vexed question of international trade, writes Sheila O'Flanagan. 

Last week, as economists were surprised by a marginal narrowing of the US trade deficit, the president repeated that the US would end trade tariffs if other countries did the same. He announced enthusiastically that the elimination of trade barriers could lift hundreds of millions of people out of poverty over the next 15 years.

It would also save the US a fortune in administration - the US harmonised tariff schedule (2005) covers a lot of ground.

Chapter 95 (there are 99 in total) covers toys, games and sports equipment, although it excludes Christmas tree candles, electric garlands of all kinds, unmounted glass eyes for dolls or other toys and a whole raft of other items, which makes you wonder what poor soul in the US International Trade Commission had to sit down and draw up the list.

At the same time as the Americans were talking about getting rid of tariffs - and obviously cutting back enormously on federal employees - president Hu Jintao of China also promised to reduce his country's trade surplus with the US. At the moment, China's exports to the US are still rising, restrictions are in place and (somewhat surprisingly, if the president wants tariffs to go) the US has threatened to impose further quotas on the Chinese.

Not that it's only the Americans who are worried about Chinese goods. The EU recently had the same argument, pithily referred to as "bra wars".

Hu Jintao insisted that China wasn't trying to pursue a policy of running trade surpluses with the US, although manufacturers in the States are making the same complaint as in the EU - low-priced Chinese imports are ruining their businesses.

As far as the current trade deficit goes, the small fall from $59.5 billion (€48.8 billion) in June to $57.9 billion in July is welcome. The Americans are selling more industrial supplies, cars and consumer goods, while buying fewer consumer goods from abroad.

Fewer Americans left home soil in July than in June, which helped the deficit too.

Although the US trade deficit is an accepted part of modern economic culture, America ran trade surpluses up to the 1970s. But as post-war Europe and Japan finally began to compete, those surpluses shrank until, by 1998, the deficit was at 2.9 per cent of GDP and economists were despairing of the fact that the US was trading away its future. Even with their dire warnings, the deficit continued to grow and the economy with it, reaching 5.8 per cent of GDP by the end of last year. To reverse the deficit now, export growth would have to exceed import growth by nearly 55 per cent, which seems highly unlikely to happen.

Despite the hand-wringing that goes on about Europe being the senile old bean of world trade, the US deficit with the EU rose by 14 per cent last year, although most economists expect that to reverse somewhat given that the dollar has stopped its relentless appreciation.

One country's deficit is another's surplus and managing to keep both of these in some kind of equilibrium is what makes world trade such a tricky subject. Every economic book will more or less say "free trade good, tariffs bad" and most people will accept that in principle, but politicians will always wonder if they can't tweak the rules to protect an indigenous industry.

Over the past number of years we've seen "free trade good, tariffs bad" in practice in what has become the globalisation of markets, and although we might understand the economics behind it, what those books never did really get to grips with was the practical consequences in a region where business suddenly disappears.

When the economists were writing their books , they were thinking of a perfect world where industries could move around unfettered and one country's competitive advantage in producing something meant that business would flow in its direction. Theoretically, of course, when that competitive advantage disappears, the industry moves somewhere else.

The problem is that industries are made up of people and the "workers" described by economists don't just simply nod in acceptance and decide to pack up and move to follow the jobs. People with families can't simply uproot every time an industry does. It makes perfect sense that they should when you're talking about a worker as an abstract "factor of production", but a living, breathing person is a different matter.

However, in an age when more and more of us are able to buy goods across borders, we certainly aren't prepared to pay higher prices to protect domestic industries that are seen to have become inefficient. We might not entirely like the consequences, but regions where old industries are no longer efficient have to look forward to new ways of making money.

Protectionist methods don't really help. They may prop up an industry in the short term, but they don't deal with the underlying cause. First world countries imposing tariffs on Third World countries to protect home industries does, indeed, help to keep people in poverty.

George Bush rescinded steel tariffs he imposed against Europe because they had the opposite effect to his intentions. They ended up by increasing the price of steel, so that manufacturers went overseas for steel product and US workers lost jobs.

He may now have realised that the theory is right after all, and that sometimes the practice works too.