Pete Kendall's Socio Times: A Socionomic Commentary

Protectionsim makes a big comeback grounded in growing fear, distrust
In the wake of the Dubai ports imbroglio, some lawmakers are saying the U.S. needs to rethink its openness. Rep. Duncan Hunter, R-Calif., chairman of the House Armed Services Committee, for example, is demanding that all of the USA's "critical infrastructure" be owned and managed by American citizens.

Hunter's legislation would require foreign companies that own anything deemed "critical" to national security, economic security or public health to sell within five years. Sen. Charles Schumer, D-N.Y., reacting to the surging U.S. trade deficit, has proposed imposing a blanket 27.5% tariff on Chinese imports if Beijing doesn't allow its currency to appreciate.

A combustible mix of security and economic dangers has left Americans increasingly unsettled about their engagement with the rest of the world. Color-coded terror alerts and the persistence of the global al-Qaeda network mean danger is a fact of daily life. Compounding public unease is the relentless economic rise of China and India, which seems to imperil many Americans' financial futures.

From 1994 until last year, a solid plurality of Americans saw foreign trade as an opportunity rather than a threat, according to USA TODAY polling. In May 2000, for example, trade was backed 56% to 36%. But in a June 2005 survey, by a 48% to 44% margin, more respondents judged it a threat.

The USA isn't alone in getting cold feet over globalization. Europe, too, is witnessing a renewed concern. In France, Spain and Poland, governments are blocking foreign firms from acquiring companies even in seemingly benign consumer industries.

"I think we're riding a wave of xenophobia," says William Reinsch, president of the National Foreign Trade Council, a pro-trade group.

This isn't the first time the U.S. has faced the issue. An earlier age of global economic integration in the decades before World War I ended with the guns of August 1914. After the war, trade recovered in fits and starts. But then the 1930 Smoot-Hawley Tariff triggered a protectionist frenzy that by 1934 had slashed international trade by two-thirds.
USA Today, March 15, 2006

China Says It Will Protect Steel Makers
China's government on Wednesday expressed concern at soaring iron prices and warned that it would take unspecified measures to protect its steel makers if talks with foreign suppliers of iron ore fail to produce reasonable prices.
Associated Press, March 15, 2006

Protectionism Storm Clouds EU Talks
A growing storm over protectionism is increasingly dividing the European Union as finance ministers meeting in Brussels argued over the role of the state in their economies.

State intervention in a series of recent high-profile corporate deals has deeply divided member countries, leaving the European Commission scrambling to defend the benefits of the EU's common market.

Luxembourg Prime Minister Jean-Claude Juncker warned that open European markets meant little to individual citizens as they look for security from the state in the face of upheavals caused by big corporate deals.

"We must not believe that our compatriots will turn towards Europe when they feel they are threatened by industrial projects that they don't understand," he said late Monday after chairing a meeting of eurozone finance ministers, which featured a "healthy, wise and virtuous" debate about protectionism.

Italian Economy Minister Giulio Tremonti warned that Europe faced gridlock if EU governments presented protectionism as a solution in member states, including France and Italy, that are entering electoral periods.

"If the theme of control of property, limits on property, nationalism, internal protectionism, becomes a theme of domestic election campaigns, Europe as it is now will not last another year," he said.
Agence France Presse, March 14, 2006

Outbreaks of "economic patriotism" have been rampant in recent months.

China said it wants domestic companies to build its high-speed rail lines, its canals and its power stations and South Korea is upset at an offer by a US corporate raider for the South Korean tobacco giant KTG.

"We are getting back to a tougher stance in terms of economic confrontation," said Christian Harbulot, the director of School of Economic Warfare in Paris.
Agence France Presse, March 14, 2006

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Some Would Like To Build a Wall Around U.S. Economy
By: Pete Kendall, March 15, 2006
If one country does not adopt protectionism, its trading partners will. Either way, the inevitable dampening effect on trade is inescapable.
Conquer The Crash

The socioniomic dynamics behind the movement against trade freedoms is covered in the Cultural Trends section of this month's EWFF. The scale and momentum of the trend are evident in the global range and quickening pace of these stories. They range from Europe to the U.S. and China and all came within the last 24 hours. As more nationalistic trade policies emerge, once hyperbolic foreign markets like Dubai and Brazi have reversed course.  These could be the first hints of the global capital flight that is bound to accompany the new era of "economic confrontation."

Additional References

July 2005, EWFF
A Bearish Tradewind Blows In
Read this excerpt from Conquer the Crash:
Bear markets engender trade protectionism. When fear makes people defensive, they often act on impulse, without full regard to reason. Protectionism is correctly recognized among economists of all stripes as destructive, yet there is always a call for it when people’s mental state changes to a defensive psychology. Voting blocs, whether corporate, union or regional, demand import tariffs and bans, and politicians provide them in order to get re-elected. If one country does not adopt protectionism, its trading partners will. Either way, the inevitable dampening effect on trade is inescapable.

The U.S.-Sino trade relationship is suddenly crumbling. This change confirms that wave 3 down is in effect. In addition to the clear parallel to Smoot-Hawley in July 1930, when the end of another important second wave rally ushered in the Great Depression, the emerging trade tension is accompanied by a misplaced sense of confidence that a trade war can’t happen just because it is “rash,” “unreasonable” and downright “insane.” In addressing the textile trade dispute between China and the U.S., for instance, one expert noted, “If the trade dispute on textiles deteriorates further, the global trade system could be hurt.” He therefore predicted that concerned parties would “compromise by taking a step back.” But the irrationality at the center of the unfolding conflict is precisely the bear market result that Conquer the Crash anticipated.

The bipartisan Schumer-Graham China Free Trade bill would slap a 27.5% tariff on Chinese goods. Early this week, when 67 of 100 U.S. senators supported the measure, pundits quickly discounted its chances. “It’ll never pass the House,” said one. On Thursday, Senators Schumer and Graham decided to temporarily shelve their bill when China revealed that it is likely to make its exchange rate more flexible, perhaps within two months. The agreement, if it comes to fruition, will probably be the focus of much celebrating, but the resulting euphoria will be an echo of September 2000 when the U.S. senate voted to permanently recognize trade ties with China. The October 2000 EWFF used the resulting outburst of bullishness toward China to bet against a positive outcome for Chinese equities saying, “This vote is the bull market counterpoint to the communist takeover of China at the bottom in 1949, which marked the end of the last Supercycle degree bear market in inflation-adjusted terms. It pays to invest contrarily to widely held views.”

There’s a big difference between this latest “trade deal” and those of the all-time highs. A new tone governs the debate, and it’s clearly away from the laissez-faire trend of the last half century. It’s the will of the people, and the politicians will find a way to express it. “Lawmakers from both parties had stockpiled bills to punish China,” notes one article. China is actually forcing the issue with bids to buy Unocal and Maytag. Both bids are from companies that are owned by the Chinese government. The former head of the CIA, James Woolsey, calls the effort a “conscious long-term effort to take over . . . as much of the American economy as possible.” The media are already framing these events as a primary cause of the recent brief stock market swoon, saying stocks fell because Wall Street smelled the “prelude to a trade war, and it doesn’t like what it sees.” But remember, the above quote and others like it in EWFF, EWT, At the Crest of the Tidal Wave and scores of media interviews that we have done in the late 1990s when protectionism was a 1930s relic. EWI has consistently maintained that trade tension would be an unavoidable by-product of the downturn. 

At the Crest of the Tidal Wave
Political manifestations will include protectionism in trade matters, xenophobia, the dissolution of old alliances and parties, and the emergence of radical new ones. Tariffs will become popular, regardless of the fact that virtually everyone knows they are dangerous and wrong, because they are a consequence of an increasingly negative psychology involving fear, envy and a misguided attempt at self-defense.

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