(FORTUNE Magazine) – WHICH TOWN IS THE SOCK CAPITAL OF THE WORLD? IT'S a ridiculous question (unless you happen to have an unhealthy affection for hosiery), but it illustrates a problem of historic dimensions for the U.S. We're becoming less competitive in many areas of the global economy, but instead of responding by becoming more competitive, we're putting up walls and pretending we don't have to compete. If you thought the opposite was happening--that free trade was on the rise--that's understandable, what with the high-profile passage of CAFTA and the recent end of global textile and apparel quotas. But behind the headlines, protectionism is creeping back, and that's bad news for America. To understand what's happening, get a whiff of the sock saga.

The Bush administration desperately wanted Congress to approve CAFTA (the Central America Free Trade Agreement), which was no problem in the Senate but a big one in the House. Terrified by outsourcing, America doesn't like the sound of free trade these days. Across wide areas of the South, where thousands of jobs in apparel and other industries have disappeared, the term is nearly obscene, and not the sort of thing a Representative votes for. That's especially true if you represent Fort Payne, Ala., the self-proclaimed Sock Capital of the World.

Congressman Robert B. Aderhol, the Republican who represents Fort Payne, was one of the last holdouts on CAFTA. He finally voted aye, providing CAFTA's tiny margin of victory, after the White House promised him it would seek new protections against imported socks. True to its word, the administration announced just five days later that it would begin the process of extending the existing limits on sock imports from China.

But the whole little drama is pathetic. The obvious reality is that Fort Payne is no longer the Sock Capital of the World and will not be again in the lifetime of anyone now breathing. The world's sock capital is Datang, China, which produces nine billion pairs a year at costs so low that no one in the developed world can even think of beating them. Workers in Fort Payne, which produces 728 million pairs a year, get $10 an hour. In Datang they get 70 cents an hour. Game over.

So cranking the vast federal machine that will eventually find cause for a "safeguard action" on Chinese socks only postpones the inevitable. It allows capital to keep being employed inefficiently and workers to fall further behind in learning the skills they'll need to compete in the global economy. It's insane--but it's the road we're traveling, and not just in in our stocking feet.

When global quotas on textiles and apparel disappeared on Jan. 1, the event got major coverage as the culmination of years of negotiations by scores of countries, a triumph of the World Trade Organization. But a few months later the U.S. quietly shut down much of that newly free trade. Our Commerce Department found that the new Chinese goods were "disrupting" U.S. markets, and in those circumstances the WTO lets a country reimpose restrictions. That's what we did. What exactly does "disrupting" mean? It's what happens when foreign competitors are too good and American consumers benefit too much. So we let U.S. firms and workers live in their dream world a little longer.

Stealth protectionism works in other ways as well. Antidumping laws let the Commerce Department impose steep duties based on remarkably mushy criteria. If a foreign firm sells its product here for less than it charges elsewhere (never mind why) or less than its supposed production cost (which is unknowable by an outsider), then the law says massive duties may be justified. Under an amendment championed by Senator Robert Byrd, the income from those duties can even be paid to the U.S. firms already benefiting from them, a practice the WTO has ruled illegal. And so U.S. antidumping actions have been increasing for years, as global trade has become freer.

Protectionism is more difficult in services, but we find a way--without calling it by its real name. We've drastically reduced the number of skilled tech workers we admit from overseas by saying it's a post-9/11 security measure. Many state governments have outlawed outsourcing of services in government purchasing, proclaiming their devotion to U.S. workers, and never mind the extra cost to constituents. If all that stealth protectionism were a response to an economic blip, it might be barely justifiable. But we're confronting long-term changes to the global economy. A growing number of U.S. companies and workers are becoming uncompetitive and, like our sock industry, won't be getting their edge back soon or maybe ever. We should help them confront reality and adapt to it. Instead, we're attempting the impossible: a doomed effort to protect them from the real world.

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