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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.

At the 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 WTO."

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 the world.

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

 

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