The protectionist curse

The United States Treasury Department decided to publish a monitoring list of countries that supposedly apply economic policies damaging the U.S. Five countries are on the list: China, Japan, South Korea, Taiwan and Germany.

There are three criteria for inclusion on the list: a foreign trade surplus with the U.S. of more than $20 billion, a general balance of payment surplus higher than 3 percent of gross domestic product, and a record of unilateral interventions on the currency markets. If all three are met, and no “corrective” actions taken, sanctions can be imposed.

At the moment, no country fullfills all three criteria. However, all five countries on the current list meet two of them. It appears that the Treasury is trying to use monitoring as a means of pressuring U.S. trade partners to become less competitive.

Most countries landed on the monitoring list not due to interventions on the currency markets, but because of high surpluses on their foreign trade and balance of payments balances.

The Treasury is trying to use monitoring as a means of pressuring U.S. trade partners to become less competitive

These surpluses are achieved ­– by Germany and South Korea, at least – thanks to superior quality and productivity, and not owing to government subsidies.

In the short term, the effect of the U.S. Treasury’s monitoring may be to punish foreign competitors and protect the U.S. market. But in the long term, the real damage will be inflicted on the U.S economy.

Curbing productivity must inevitably damage world economic growth, and limiting competition will always result in lower productivity and quality and the country that practices protectionism.