American led new trade protectionism
Friday the September 11, 2009 US President Obama imposed new tariffs
on imported Chinese tires. New rules are effective from September, 26.
The first year tariff is 35 percent, second year 30 percent and for the
third year it is going to be 25 percent. This is the first such decision
made by Obama administration.
Shanghai Stock Market
January 21, 2009 the Daily News published a article written by me.
There I wrote "Countries cannot prevail economically with huge trade
deficits. It is true for the United States and true for Sri Lanka too.
With the global economic crisis, which is going to last at least for
another decade, the United States and major western economies
essentially made the WTO redundant. Those countries used and will be
used in near future enormous fiscal incentives to protect their local
industries and financial institutions, which is not fully acceptable to
The above analysis was based on the System Gap theory. With
continuing trade deficit consumers debt to income ratio increases faster
creating a debt crisis; it can be domestic or foreign debt crisis or
both. Consumers' debt to income ratio is an important parameter that
should be taken care of to ensure growth.
It needs to be manipulated too for the best interest of the society.
This is what was failed by US monetary authorities and we got the
current economic crisis.
Hearing the news of new tariff Chinese authorities quickly responded
saying that they would take the matter before the World Trade
Organization (WTO). It is not unusual that countries go before WTO to
get settled trade disputes.
Yet Obama's imposition of new import taxes is not a simple trade
dispute. It is a desperate measure to save American jobs and to narrow
huge trade deficit.
It seems free trade is going to be the next casualty of the ongoing
global economic crisis.
The dilemma faced by the US is unprecedented. On the one hand it has
to stick to free trade policy and on the other hand it has to stabilize
the dollar. If free trade policies continued, ever increasing U.S. trade
deficit will continue to rise. If the deficit rises, the stabilization
of dollar become impossible and it should devalue.
In previous crises, the US did not care much about the devaluation of
dollar when it wants to default its monetary obligations to the rest of
But this time the situation is different not because dollar has a new
competitor: the Euro, but due to Chinese factor.
After the World War II, the U.S. got other European nations to enter
into an agreement call "Bretton Woods Agreement". Under the agreement
the U.S. promised to exchange one of gold to 35 dollars. Europe borrowed
dollars for reconstruction.
Europe bought steel and capital goods from the US with borrowed money
that was necessary for reconstruction. America made money from those
exports and also lending money.
In turn, Europe did reconstructions and exported goods and services
to the US. As a result the US and Europe recorded a steady economic
growth until troubles began in late 1960s.
To be continued