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William R. Thomson

William R. Thomson

William Thomson, Chairman of Private Capital Ltd., an advisory company in Hong Kong. He is also a director of Finavestment, London.

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Will the US Go Protectionist?

It's a ritual that repeats every four years, first during the US Presidential primaries and then later the election itself - the candidates stomp the prairies, and industrial heartlands, with promises to better the lot of the American worker in today's global economy. Fair trade not free trade is a particularly popular slogan. Then comes the election and the installation of the new President and it is more or less business as usual: more free trade agreements, more Doha rounds and more mock battles between the Executive and Legislative branches over environmental and health and safety standards, which are the codes words official Washington uses for its fairly mildly protectionists policies. Globalisation supported by huge commercial and financial interests pushes ahead remorselessly.

The primaries this year have been no exception. John Edwards campaigned far to the left for the union vote. Hillary Clinton has run against her husband's NAFTA agreement that effectively created a North American customs union and has asked for a 'timeout' on future trade deals. She has won the blue collar vote overwhelmingly. Obama has also shifted to the left as the campaign has developed. Only McCain, the Republican candidate, has declared himself a free trader but the odds are against him winning the November election.

So is it business as usual or is this year really different? Whilst one should not read too much into primary campaigns there are substantial grounds to believe this election is significantly different than any for more than a generation and could well have a quite profound social and political impact. The United States Presidential elections have tended to go in approximately 36 years cycles as regards policy and a change in the dominant party. The time for change is upon us.

The Republicans generally controlled the White House from 1896-1932 (from McKinley to Hoover) following a small government, generally free market approach. The Democrats took control in 1933 with Roosevelt and controlled the commanding heights of policy till 1968 with a high tax, relatively highly regulated,  big government regime. The Republican revolution began in 1969 and gathered momentum under Reagan, who was elected in 1980 on a platform to roll back the state. The revolution has largely run into the ground under the Bush administration and the economy and the whole financial system are now possibly facing their most profound challenges since the 1930s.

A new paradigm is waiting to be created. Operating under the rubric of the 'war on terror' government expenditures and regulatory measures have mushroomed since 911 whilst, incredibly, taxes have been cut. The result has, of course, been the explosion of debt, governmental and private, and a speculative orgy financed by the country's creditors. An authoritarian surveillance state has arisen. The hangover is now facing the United States, so the next few years are likely to be very different from those spurred by the Reagan revolution and its descendants.

The disparities in wealth created by the late finance boom have come at a time when the US blue collar worker is incredibly now worse off than he was back in 1970 in terms of real, after tax income. That is a generation and a half of decline, something unprecedented in American history where every generation is supposed to do better than its predecessor. His union job and the accompanying health benefits and pension have been outsourced overseas and he has been forced to take lesser skilled and less highly paid remuneration. He has survived by having his wife join the labour market and using his house as an ATM until recently. Now that game is over and he is facing a tough retirement. In recent years the middle class has also suffered a similar incomes squeeze as globalisation has expanded its reach upmarket and into the service areas - and the middle class votes.

So within the US some class envy is surfacing and a mood emerging is emerging to trim some of capitalism's excesses and address certain broken social issues, including affordable health care and college education, as well as rebuilding the domestic public infrastructure of roads, bridges etc., where there has been woeful underinvestment for a generation or more.

The probabilities favour a Democrat being elected as president in November coupled with enhanced Democrat majorities in the Congress. If that happens, change will be inevitable. Those changes will include changes to the health care system to provide some form of universal access, increased income taxes on the highest earners, increased government spending in general and increased regulation of financial services, in general, and banks, in particular. This may have to be the costs for the substantial bailout of the banking and housing markets in the wake of the present ongoing debacle that was evidenced by the Bear Stearns emergency.

But will it mean the country goes protectionist? Probably not in a major way on trade. Future deals will become harder to negotiate and even more fraught than they are at present, with a greater regulatory burden that panders to domestic US interest groups such as labour and the environment. But the powerful commercial interests in favour of globalisation will remain and will probably prevent anything too dramatic happening.

Equally on the financial front, one can expect plenty of loud voices demanding transparency against sovereign wealth funds taking over US corporations but, at the end of day, an accommodation is likely in most cases. After all they have the money, and money follows the golden rule - he who has the money makes the rules. If an accommodation is not reached then the role of the US dollar's position as the world's sole reserve currency is even more endangered than it is at present.

In conclusion, the United States is going to have to adjust to a somewhat different position in the world than it has enjoyed since the end of the Cold War; an era of lower growth and a restructuring of its economy to meet new and emerging needs and of a greying population amid the turbulence of change as power shifts in the world to the BRICs. If the US is being challenged then the impact will be felt everywhere to some degree. But the chances of a new Smoot-Hartley Act, which brought on the great Depression of the 1930s, are, hopefully, one lesson that has been well learnt.


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