Protectionism: Playing With Fire

A bad recession in the early 1930’s turned into the Great Depression largely because politicians did what they are wont to do. Legislate badly. We may be staring down the barrel of that gun once more.

A short article in the New York Times which deserves to be much longer points out that relations between China and the U.S. are deteriorating and the governing class has plans to dump some gasoline on the fire.

Specifically, business, unions and lawmakers are getting ready fo force the Obama administration to walk a hard line with the Chinese on their currency value and trade policies. Recall, that Obama ran a campaign that was just a step away from outright protectionism. He hewed to the conventional wisdom that if we could just bring the Chinese, Mexicans, Canadians and assorted other villains to heel then our balance of trade problems would be cured. Now those campaign chits are being called in at the worst of all possible times.

The head of the Senate Finance Committee, Max Baucus, Democrat of Montana, plans legislation to raise tariffs on dumped imports from China and elsewhere. And new Democratic congressmen like Larry Kissell of North Carolina and Dan Maffei of New York have pledged actions to stop jobs from being shipped to China.

China’s exports declined in November for the first time in seven years, and economic growth may slow by more than half to as little as 5 percent in 2009, according to the Royal Bank of Scotland. That has prompted China’s leaders to increase tax rebates on thousands of exported products; meanwhile, the yuan’s steady rise against the dollar stalled in July, and the currency has barely budged since.

American companies are preparing trade complaints that could lead to increased tariffs. Lawyers representing companies like Nucor, a large steel maker, NewPage, a maker of coated paper, and smaller textile and steel pipe makers say they are considering new trade complaints against China. Policies in both countries are shaped by the need to cope with steep falls in employment.

If this doesn’t resonate with you, it should. One of the roots of the Great Depression was the collapse of world trade brought about by protective tariffs. The lesson, which no one has ever disputed, is that if ever again faced with a similar situation, cooperation and concession must be the order of the day. Now faced with a similar situation, we seem to be in danger of repeating the same mistakes.

Before this spins out of control, Summers, Geithner and even Obama have got to make it clear that no good will come from protectionism at this point in time. That means whipping the Congressional Democrats into line. There will be a time and place at which to address these issues. Now is neither.

If you read this blog much, you know that I consider the current problems as they exist within this country fixable. I may disagree with the methods but I believe we can muddle through without too much damage. At the same time, I fear that events outside this country could run completely out of control and destroy our ability to manage the issues. If we contribute to that sort of instability then we may well deserve the fate we create.

Comments

[Socialism c...:]

Wow. Author is WAY wrong! Collapse of world trade during the G.D. brought about by protectionism?? No. It was precisely globalism that allowed national economic trouble to become a global contagion...countries were *reacting* -- i.e. a reaction is not a *cause*, but a *result*!! THE huge problem with globalism is that it disallows fine-tuning of economies based on national or even smaller -- regional or local -- conditions!! Differences in costs of living, costs of labor and resources must go by the wayside, in order to force global parity in trade values. That IS NOT WORKABLE unless those costs are equal...and I cannot see that they ever possibly could be! Economics is by definition a game of relative value. Global economic equality simply cannot be imposed...there is NO WAY TO DO SO. Therefore mandating "free trade" amounts to pillaging some countries to the benefit of others, and the benefit of the elite cabal that control interest rates for fiat currencies.

It is the DUTY of any national government to do what is needed for that nation, not what is desired by others around the world!! Are there political benefits to expanded trade? Yes, some. There are also political and security benefits to self-interest and self-sufficiency! Bowing at the altar of "globalism uber alles" is nothing short of TREASON and catering to the super-wealthy global elites who HAVE NO ALLEGIANCE to their country -- ala Paul Wolfowitz: "the nation state is dead." To hE11 with that, Wolfie -- push us too far and we'll see who still loves this country and what they're willing to do about you and your type. And that includes any author who jumps on the anti-protectionist bandwagon: best think about the sovereignty of your nation, instead of your far-left, whacked out notions that protectionism is a problem. We could use a good deal MORE protectionism!!

2008 Dec 29 05:43 PM

[Chance Deve...:]

The Great Depression happened because of a lack of faith in banks, not Smoot-Hawley.

America's problem is we depend too much on the global economy. We export FAR less than we import - putting tariffs on imports, logically, helps us more than it hurts.

Without higher tariffs we will continue to bleed good jobs out of the country - the resulting drop in consumer income and therefore spending will destroy America anyway. Look how bad we are now because of stagnant wages.

I favor protectionism - looking out for our own family and country first is a duty, not a pipe dream.

2008 Dec 29 08:05 PM

[nmelendez:]

So what. If the rest of the world tolerates us it's because we provide them a good service. I say up with the defecit and 25 per hour minimum salary. We can all visit china and take photos of the cute pandas.

2008 Dec 29 08:09 PM

[whidbey:]

It is a fear that it will become even more political to lock the ports to both incoming and outgoing cargo. The effects will be to make deflation look like the breath of spring as compared to death by a thousand cuts. First oil rises, then Congress controls prices, then makes allocations to users, then finds new energy sources. The gates of hell open and we walk in to the new definition of living too long.

2008 Dec 29 09:36 PM

[Asbytec:]

I am a fair trader, I support fair trade. Unfortunately China isn't and doesn't. China devalues it's currency, as everyone knows, to keep exports cheap. In doing so, they buy surplus dollars and flood the FX with RMB.

That has been beneficial during periods of massive American consumption. It's helped mask inflation (Ron Paul, congressional hearing) in the US during massive money creation. They financed American debt with our own money...which we still owe them with interest.

To put it bluntly, China has been a leech on the buttocks of America. We've been supporting huge trade deficits with China for far too long. But, I guess that's the plan, eh, when opening China to free trade? Allow China to ride on American coat tails into prosperity. Allow them to see the wonders of demand economy and turn away from their command economy (geopolitical, not economic argument.) Give them time to form a sustaining middle class in hopes we can sell cars to them at some time in the future.

It hasn't worked, yet. Instead, we still get shoddy and dangerous products from China after (some) 20 years of this free trade arrangement...experime... It didn't take Japan this long to begin producing goods and services Americans actually bought.

No more free lunch. It's time to call China on the carpet and pressure them to allow their currency to float. That will put an huge dent in cheap imports as their currency spikes under pressure to valuate.

But, our trade deficit will go down and China will be forced to enter the capitalistic concept of quality and efficiency and actually compete in the global market. If their products cannot compete on anything other than cheap labor costs, we'll we'll just have to buy from the EU, other Asian nations, or maybe South America...or maybe from ourselves.

However, I think Obama will be the next in line to be told, "no." So, maybe tariffs will be a tool to pressure them a bit. The republicans have been reluctant, maybe the Dems won't be. Yes, success in the free trade arena means inflation in the US. That's good, isn't it? Isn't that what we're trying to stoke up, right now?

Then, maybe interest rates can normalize a bit...some baby milk and pet food jobs can be created. Maybe we can make our own Christmas ornaments, too. Anyway, you get the idea. Free trade works when free trade works correctly. In the case of china, it hasn't and it needs to.

2008 Dec 29 10:31 PM

[Anthony Alfidi:]

The Smoot-Hawley tariff regime was enacted in a world that had no WTO, no NAFTA, etc. A similar attempt today would run into well-funded legal challenges (from the Business Roundtable et alia) all the way to the Supreme Court. Liberalized trade will fortunately be around for a while.

2008 Dec 30 02:04 AM

[Steven Hansen:]

free trade is not a black or white issue. i just do not understand the concept that if a liter of water is good to drink per day, 50 liters is better yet. fair free trade should benefit everyone. when one party gets to use a different set of rules, one party loses.

in america, we also have a different problem. displacement of the workforce. simply put - we are losing jobs in america. we can debate all day the reasons, but we cannot let this continue as it will eventually kill the economy and create social unrest. we need a solution. the solution is not to stop trading, but find mechanisms to create jobs. market forces are not creating the solution so it will require intervention.

trade requires oversight and corrective action by government. all the asian governments are tigers on trade. we either play ball their way or force them to change. the way we are going, america will lose.

2008 Dec 30 02:52 AM

[Moon Kil Woong:]

Well we can rant and rave all we want about China's cheap currency and not playing fair, but even if they double their currency's value their average salary will still be far below ours. Likewise, China can rant and rave all they want about the paltry interest rate on treasuries and the US's growing debt and cheap money policies. In the end the US still needs cheap products to prevent inflation and scarcity and China still needs someone to buy their stuff. The US still needs someone to buy their treasuries to pay the debt and China still needs a strong trading partner with a global currency since they lock the Yuan up making it not really a open tradable currency (that way they can manipulate the currency to buffer their economy from ill winds like what happens to SE Asia regularly).

International trade is based on mutually beneficial alliances. Each party gets something, each party gives something and both parties hope that the trade is equitable. It is not always balanced but even so, it can result in a better outcome than no relationship.

I can tell you now. The US without China, Japan, Asia relationships would be in a very very bad position. Probably worse than Europe. Likewise Asia would be in revolution mode without the US. The US would not be able to float a penny more of deficit spending. Asia would not be able to sell 1/2 of what it produces. Inflation in the US would turn sky high and the US would have to impose austerity measures. Deflation in Asia would ravage the economies and their cities would be flooded with riots.

So clearly, international trade is good for the US and Asia. Such an alliance has let America benefit from a technological revolution and expanding economy that Europe has largely missed.

You can debate the effects of the cessation of or restriction of trading during the great depression but the effects in this day and age are quite clear. It would be disastrous.

2008 Dec 30 03:07 AM

[Rob Viglione:]

There are certainly many serious issues to consider with unfair trade practices. I am not aware of a single country that has fully free enterprise and trade policies. Everyone subsidizes its favorite industries and uses tariffs, dumping laws,and other market distorting policies to gain advantage for select groups within their jurisdiction.

None of this is good, but it cannot be ignored during trade negotiations. America is, and has been, guilt of some of the worst protectionism and distorting policies. Yet we demand everyone else plays by the rules of free trade.

Free trade is fundamentally a good thing. Trade between households, villages, towns, cities, states, and countries are all good for the same exact reasons. The world's current trade environment is relatively open, but highly distorted and cannot be called free or fair.

Whatever policies our government pursues going forward should acknowledge the value of free and fair trade (which are one and the same thing), and drive the world in that direction, at least for those countries that want to participate.

2008 Dec 30 12:57 PM

[Rob Viglione:]

There are many reasons for the Great Depression, many of which have been identified and some we probably don't understand. Lack of faith in banks was one reason. The Smoot-Hawley Tariff was absolutely a contributing factor, highly destabilizing trade regimes and harming the world economy, particularly for those countries that depended on trade with the U.S., like post-WWI Germany.

Using force to alter markets and socially engineer society has consequences, some of which can be dangerous.


On Dec 29 08:05 PM Chance Deveraux wrote:

> The Great Depression happened because of a lack of faith in banks,
> not Smoot-Hawley.
>
> America's problem is we depend too much on the global economy. We
> export FAR less than we import - putting tariffs on imports, logically,
> helps us more than it hurts.
>
> Without higher tariffs we will continue to bleed good jobs out of
> the country - the resulting drop in consumer income and therefore
> spending will destroy America anyway. Look how bad we are now because
> of stagnant wages.
>
> I favor protectionism - looking out for our own family and country
> first is a duty, not a pipe dream.

2008 Dec 30 01:03 PM

[carey_jim:]

I agree that tariffs are usually a bad thing and that we should encourage free trade between all countries when possible.

But they have often been used by countries, including the United States in the 19th century, to protect infant industries and allow them to grow. Japan and Korea, to mention only two countries, used tariffs in the same way during the second half of the 20th century.

Also, many countries have used economic blockades even in peace time: Think of the South African embargo and the embargo and quasi-blockades of communist countries such as Cuba (in the early years.)

The Smoot-Hawley act had little effect on the Great Depression because only about 5% of the 1930 GDP was from trade. This time, however, much more of the GDP is from trade, and therefore I think you are right, tariffs would have a much greater impact and would be worse than playing with fire, they would be pouring gasoline on the fire.

2008 Dec 30 03:20 PM