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Open trade increases stimulus impact

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By Michael R Czinkota

The U.S. is preparing the largest economic stimulus measure ever invoked by any nation. The House has already passed one version, the Senate is now beginning its considerations. We know that there is no perfection. When more than $850 billion are to be allocated, there is bound to be controversy about who gets what. There may even be some inefficiency and waste in these expenditures. After all, we’re only human. But great care needs to be taken not to trigger an avalanche of global protectionism which reduces the effectiveness of economic support.

The policy objective is to find ways to jumpstart the U.S. economy. The accepted consensus has already led to the expenditure of large amounts of government money in support of special economic sectors. So far, the banking, insurance and automotive industries have been the ones benefiting most from subsidies. However, the market response has been insufficient. Therefore, the plan is to spend more so that the economy can fire on more of its cylinders. The expenditures will eventually far exceed a trillion dollars.

Trying to spend one’s way from the abyss of a depression will extract a long term price. For example, there will be higher taxes. While upper level income earners will be particularly asked to contribute, the tax burden will eventually also weigh on the much more numerous middle class. There will be, over time, a substantial inflationary effect, which will depreciate retirements and savings. Sooner or later, the value of the U.S. currency will be depreciated, leading to adjustments in the cost and quantity of trade. These effects are recognized and we appear to accept them in exchange for a soft landing of our economic hopes and dreams, rather than a hard crash.

However, the “Buy American” mandate in the package weakens the effect of the stimulus and places exporters globally at risk. With apparent logical consistency, it is argued that the purpose of a domestic stimulus measure is to save and create domestic jobs. Therefore, the funding should support only domestic industries. Foreign companies and products should not be benefiting from a domestic stimulus.

Though facile, this logic suffers from some major fallacies. First, a preference for domestic products at any price will lead to reduced domestic competitiveness and higher prices. Such effects are neither small nor temporary. Domestic legislation cannot reverse the globalization of economies which has taken place. The decades of efforts which have turned most countries into low barrier economies have enabled the U.S. to become one of the leading export powers. It took much pounding and many adjustments to get there.

I remember persistent negotiations with the Japanese government to change its legislation which restricted the building of large grocery stores. We did so, because mom and pop stores were much less likely to purchase and carry imported products. Negotiations were also focused on the establishment of fair standards so that firms could have an opportunity to enter into markets and make their mark. The outcome did not always satisfy everyone (for example U.S. efforts to open global markets for wood exports mainly helped Canadian producers), but at least firms had the opportunity to compete abroad.

Throughout the decades of tearing down international barriers, research clearly informed us about the "burden of foreignness." Outsiders typically are at a disadvantage since they don’t have the contacts, the social positioning, and the understanding of a market enjoyed by domestic firms. They have to bridge the distance between markets. They also suffer from domestic decision makers considering their customary suppliers first, and doing the deal with the neighbor and friend from college. That’s how it is and how it should be. Context matters!

However, legislation which eliminates competition and encourages wasteful expenditures will decrease resources. Just because a legal provision does not require any financial allocation, does not make it free of costs. Legislators should know that in its consequence, a “Buy American” provision would, in its consequences, cost the U.S. and the world billions of dollars and reduce the number of jobs.

If outsiders can overcome their burden of foreignness, and, in spite of it, offer lower prices at the same or better higher level, they should be eligible for a contract. Doing so will avoid the re-emergence of a new competition in trade restrictions. Monies will also be spent more efficiently, letting the stimulus measures go further and accomplish more.

When a firm ventures abroad it is an outsider in other nations. The reception it receives there will be driven by the openness offered by its own home nation. Every time a U.S. exporter is losing business abroad in retaliation for domestic restrictions, the effect of the stimulus on the economy is reduced. Valuing domestically made products highly is good. Using this appreciation to erect barriers would be a major sacrifice at the altar of protectionism which sharply reduces the effect of an economic stimulus.

Michael Czinkota researches international marketing issues at Georgetown University and the University of Birmingham in the UK. He served in trade policy positions in the Bush and Reagan administrations.

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There will be, over time, a substantial inflationary effect, which will depreciate retirements and savings. Sooner or later, the value of the U.S. currency will be depreciated...

Buy gold.

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What is "impact"?! : our own Toshibaka and Mitsubishki had organized their so called 'hidden network' in Singapore - Finland [Kouvola warehouses] - Russian Retail chains… (especially may be mentioned two international retailer's chains: MediaMarkt Saturn and Auchan). Is it 'open trade' or just a 'money laundering'?

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However, the “Buy American” mandate in the package weakens the effect of the stimulus and places exporters globally at risk.

The author should stop broadcasting misinformation.

First of all, the so-called "mandate" attempts to use US taxpayer dollars to fund public buildings and public works projects -- buildings and works owned by US taxpayers -- to direct business towards domestic iron, steel, and makers of manufactured products. The so-called "mandate" makes allowances for the purchase of relevant foreign products when domestically-made products are not available, or when the cost of using domestic products would add more than 25% to the bottom line of a given project.

Secondly, a preference of US taxpayer dollars on US taxpayer-owned projects going to US industries is not intended to be an act that constitutes a trade war. It is a survival response in dire times. It is the prerogative of our so-called "allies" to misinterpret it as an act of trade war and attempt to take their revenge. In so doing, they reveal their truer colors. Many of these so-called "friends" have engaged and will continue to engage in this kind of domestic-preference behavior within their own economies.

Lastly, I ordinarily endorse free trade. But these are not ordinary times. Some kind of protection of domestic industries is needed when those industries are early stages and are trying to get off the ground. While not in their early stages, many of these industries have been terribly weakened by conditions beyond their control and so deserve special consideration.

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Capitalism is share of wealth. True, the world can use a little bit more of the wealth that Americans have accumulated in the last few decades but not at the expense of our own wealth. Sorry, but US is not ready to pour our own money to revitalizing the economy of another nation so that other nations can bring their own banks and businesses to the US to enrich their economy. No, that's not how global economy works. It works in a way where we stop loosing our money first. US is at a major turning point since last November because for many of us half of our money that we accumulated through our hard work and time has been eliminated due to the crash. Just remember, we have the market and we have the power to steer this economy back to upwarding spiral. The only thing is our nation is now so diverse and so used to the riches we've accumulated, we can't turn back. So the question is yeah, how are we going to turn the economy upwards so that everyone will be getting a 20% raise after they change their job or 6% return on home equity and 10% returns on stock dividends, not to forget 3% return from Savings and CDs. When all that's back to normal, you'll see the opportunities for foreign businesses. You could understand why "Overseas T bonds" are just that, "overseas".

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The situation ain't good, so the Obama Administration should be given great latitude on the stimulus bill. Congress should minimize any strong protectionist leanings, because other economies are restraining themselves in these hard times. For me, if Paul Volcker, Obama's Economic Advisory Chair signs off on the stimulus bill, it should be enacted. It would be even better to get input from O'Neill, former Treasury Sec. from the Bush Administration. Some of the best minds in economics/finance are/were from another generation.

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The US government is bought and paid for by lobbyist.

TARP Recipients Paid Out $114 Million on lobbying my US government. The return on investment was over 250,000 percent . So why play the stock market just promise your Congressman you will give him a Million and he will steal a Billion from the US tax payers and give it to you. You do not have to be a US citizen to get the Money. Just promise any US Congressman you will send him a million dollars kick back an he will come up with a reason to send you your billion US tax payer Dollars. http://www.opensecrets.org/index.php

I understand the rule he who has the gold makes the rules. But when he takes your Gold pays himself and pays his buddies that is stealing. Politicians are taking our Tax dollars and bailing out who ever contributes the most back to them. They are Selling the debt to china, to get the tax dollars that your children’s children will be paying the bill on. http://www.opensecrets.org/index.php

Why do Politicians hold up passing these bailout bills? They wait Until they receive their contributions from the lobbyist. That right they get their share of the bailout money. Million of your tax dollars end up back in the Politicians hands. They talk about bonus going to executive. Executive who gave the Politicians millions to get your tax dollars in the first place. That is like the pot calling the kettle black. http://www.opensecrets.org/index.php

Now Obama is screaming code red just like Bush did on the middle east. I believe we needed a little control over the arms race in the middle east. But I do not believe spending trillions of tax payers dollars and being Indebted to China will save the US economy. We will never be able to slow the flow of good made in China when we owe them trillions of dollars. An open market to China means that to compete US workers will have to produce the same product at the Chinese labor cost. We will be working for a bowl of rice.

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