Protectionism is the crack of economics

This is a somewhat arresting quotation from Dallas Federal Reserve president Richard Fisher - who is a former deputy US trade representative. He explains that, if the US recovery package does result in protectionism in US industry, it will give an immediate high that leads to economic death. He is referring to the US government’s $800bn (£567bn) bailout package which includes a policy called “Buy America” meaning that all of the projects financed by the bailout should favour American iron and steel, over imported materials. It could, perhaps, even allow American preference for all “manufactured goods”.

The problem is that any such measure to reduce American imports is likely to result in retaliatory measures against American exports. Consequently major manufacturers like General Electric, Boeing, and Caterpillar are opposed to the idea even thought they could benefit from it in the short term, as they fear the effect on their sales.

On the other hand unions representing US steelworkers say it is about putting stimulus cash - American taxpayers’ dollars - towards American jobs. This would be welcomed when the domestic steel industry has fallen below 40% capacity for the first time in history. In Congress, Democrat Tim Ryan, representing the ‘steel state’ Ohio, has calculated that using wholly domestic input for infrastructure projects will yield an extra 77,000 jobs across America. Leo Gerard, President of the United Steelworkers Union, is as outspoken in his support of the package as Richard Fisher is in his condemnation of it: “Why should we send dollars to China, so that they can ship us more junk steel?”

Risk of retaliation is one of the classic disadvantages of protectionist policies. However, the need to nurse domestic industries through a downturn is one of the classic reasons to adopt them. There are many similarities here with the conflict around the Lindsey refinery in the last week - the desire to protect ‘British jobs for British workers’ versus free movement of labour within the EU, and the risk that if EU workers are not made welcome to work in Britain, then our 290,000 emigrant workers may find it harder to find work in other EU states.