Is U.S. Starting a Trade War? 29 comments
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Have our political leaders learned anything from the mistakes of the past? Here is one obvious ‘no no’:
Restricting international trade
International trade benefits everyone. To visualize what I mean, think of the 50 states as separate countries. Would it make any sense for politicians in California to impose tariffs or duties on products made in Michigan? Under our laws, they really cannot do that, but what if they could? If California imposed duties on cars from Michigan in an effort to ‘protect’ California jobs, then Michigan would impose duties on high tech equipment or fruits and vegetables coming from California. Before long, in both states, we would see higher prices, fewer choices and weakened employment. I think it’s obvious that no single state can efficiently build all the parts it needs to make stuff. Nor can it mine all the raw materials it uses or grow all the food its people need.
There is a reason we grow fruits in California when other states are out of season. And building a huge factory for automobiles is efficient only at a given volume. That means if each state had to have its own car plants, efficiency would suffer, consumer choices would decrease, but prices would increase.
This seems perfectly obvious and sensible when considered on a state by state basis, but is there anything different when it comes to international trade? Not really. A free flow of trade encourages countries to produce what they can produce most efficiently. As a result, products are more widely available and prices are lower than they would otherwise be.
For example, cars made in the U.S. have lots of parts from other countries in them. Why? Because GM (GMGMQ.PK) or Toyota (TM) or Ford (F) has figured out that, for example, a Brazilian company can make a given part more efficiently than any U.S. supplier can. Therefore, the business goes to Brazil and U.S. consumers gain a little edge in efficiency. As trade increases, prosperity also increases.
How Do You Define An American Car?
Even cars made in America by domestic car companies have foreign-sourced components.
click to enlarge
Source: Carpe Diem / Chicago Federal Reserve
This data was compiled by the Chicago Federal Reserve based on 2006 information.
Trade Wars and the Great Depression
I believe the Great Depression itself should have been just a recession, but government actions, including higher income taxes (Presidents Hoover & Roosevelt), trade restrictions (Smoot Hawley Tariff Act of 1930) and a significant contraction in the money supply (Federal Reserve) all combined to drag the economy down much more than otherwise would have happened (see How to Squelch an Economic Recovery for much more detail on this issue).
One of the biggest factors that lengthened and deepened the Depression was a trade war. The Smoot Hawley Tariff Act is widely considered to have been the catalyst for a worldwide bout of protectionism that deepened the economic contraction we call the Great Depression.
If you ever wondered how trade wars started back in the 1930s, then pay attention because it is happening again. We are in the early stages of a trade war and if some adult supervision does not come along soon, it could get much worse. Here’s how it goes.
Politicians tries to curry favor with some group and they insert a “Buy American” clause into legislation. Perhaps they think this will protect jobs in their state. Or, maybe they want to favor a given industry or trade union. For example, the American Recovery & Reinvestment Act of 2009, President Obama’s economic stimulus plan, included a significant “Buy American” provision. But it does not stop there because politicians in other countries get the same ‘bright’ idea and they insert protectionist trade policies into legislation over there as China is now doing. Rinse, repeat and escalate and before long you have a serious problem.
Just as we had in the 1930s, we now have real movement towards trade protectionism, which is an enormous policy mistake. And, we are the ones who are starting the war. Canada, Mexico, Brazil and China have all complained about the ‘Buy American’ provision mentioned above.
This piece from the Washington Post spells out some of the protectionist policies being pursued and the inevitable blowback from those policies:
Trade Wars Brewing in Economic Malaise (Washington Post, May 15, 2009, Anthony Faiola and Lori Montgomery)
Is this what the first trade war of the global economic crisis looks like?
Ordered by Congress to “buy American” when spending money from the $787 billion stimulus package, the town of Peru, Ind., stunned its Canadian supplier by rejecting sewage pumps made outside of Toronto. After a Navy official spotted Canadian pipe fittings in a construction project at Camp Pendleton, Calif., they were hauled out of the ground and replaced with American versions. In recent weeks, other Canadian manufacturers doing business with U.S. state and local governments say they have been besieged with requests to sign affidavits pledging that they will only supply materials made in the USA.
…This week, the Canadians fired back. A number of Ontario towns, with a collective population of nearly 500,000, retaliated with measures effectively barring U.S. companies from their municipal contracts — the first shot in a larger campaign that could shut U.S. companies out of billions of dollars worth of Canadian projects.
…the stimulus package marks the first time a buy American mandate has been broadly applied to projects across an array of federal agencies.
As you can see, the ‘Buy American” provisions are alive and well. The bureaucracies can easily make it next to impossible to get approval on any reasonable basis. And anyone working on a project is likely just to avoid foreign-sourced components to be safe. Of course, one additional consequence is that this proposal also concentrates even more authority in a given bureaucracy and thereby requires contractors to curry favor with the bureaucrats. Third, the local suppliers figure things out pretty quickly and they begin to charge more than the products would cost if there was competitive bidding with foreign suppliers. And fourth, by slowing everything down, it ramps up costs.
Trade Quotas and Protectionism Benefit Weak Industries
Though competition can be scary, it also carries with it many benefits because competition, whether from another state or another country, forces companies to become more efficient and productive.
In the 1960s, when Japanese and German imports first came to the U.S. in meaningful volume, domestic cars were not very good. The Volkswagen Beetle demonstrated that cars could be smaller, cuter and more efficient. The first Hondas (HMC) or Toyotas were kind of quaint, but foreign producers were forced to be more responsive and innovative in order to gain market share.
Over time, foreign car companies gained loyal customers because their cars and light trucks offered consumers something they could not get at home. Domestic car companies responded at first by calling for tariffs and quotas, not by making improvements. Eventually, domestic car companies did improve, but slowly and grudgingly.
For years, politicians pushed through various quotas and high tariffs to protect our domestic auto industries and keep American jobs. Unfortunately, those policies have not helped those companies one bit. In fact, GM and Chrysler are in Washington right now asking for additional billions in government bailouts. Other than Ford, both GM and Chrysler are government-owned. And Chrysler is on its second bailout in 30 years. Employment in domestic car companies has plummeted over the past few decades despite numerous attempts to ‘protect’ those industries.
Free trade has been one of the chief engines of global prosperity. It would be a huge mistake to adopt protectionism as the Smoot-Hawley legislation did prior to the Great Depression. Nonetheless, the politicians of today are taking steps to ignite a trade war and it is up to us to stop them.
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Mr.K. Brouwer: workers in California earn the same wages as workers in Michigan...shipping products from California to Michigan and viceversa cost the same.
Workers in china are payed $.33hr and the rest of those countries we trade with... Canada being the exception... do not make enough money to afford what they make or our products.
free trade was created for corporate America to take advantage of other countries cheap labor...for wall street fat cats...for wall street mega profits...they sold our jobs, replaced our paychecks with easy credit to keep us buying their foreign junk. and "we the people" took the bait...5 MINUTES LEFT IN THIS GAME...TIME TO KICK SOME @SS...BRING OUR JOBS BACK...BUY AMERICAN!!!
On Jun 23 08:08 PM your_financial_plan wrote:
>
> no economic improvement anytime soon'....
>
> 1st 100 days - There are 2.9 million more people unemployed in May
> than there were unemployed in January. The unemployment rate went
> from 7.6% to 9.4%.
> Since May 2008, we have lost 5.5 million jobs. The biggest losers
> were:
> Manufacturing 1.5 million lost
> Finance & Prof Serv 1.5 million lost
> Construction 1.1 million lost
> Retail & Leisure 1.3 million lost
>
> good articles... investmintideas.blogsp.../
On Jun 23 02:58 PM Valley Boy wrote:
> According to this author, we are supposed to outsource our manufacturing
> labor and consume and import foreign products. How bright is that?
> No, this activity or attitude cannot be stopped but it can be taxed.
> Some kind of revenue-neutral, carrot-and-stick taxation strategy
> could be brought to bear against what some consider free trade.
> Free for whom? A tax reduction of an equivalent amount should be
> granted to those manufacturers keeping their work within the borders
> of this country and employing legal citizens.
On Jun 24 08:27 AM Stephen Metzger wrote:
> Your suggestions amount to the same thing: A restriction on trade.
> We are repeating the errors of the 30s at home and abroad. Bring
> on the war (I don't mean trade war).
Once we get cost and wages under control and break or regulate the Unions then it will change. Our Govenerment is only looking out for there pocket books, not what is really needed. The world is tied together now and we have to work together or fall together. Lets hope that we can handle the coming storm, and be ready to pay high dollar for all goods. the other countries are getting ready to stick it to us.....
Trade restrictions only benefit
> special interests, placate the ignorant, and lower living standards?
Of course you're talking about well payed union jobs...in your mind...those of us who's wages haven't being lowered are ignorant and we're lowering our living standard with our buying power...in your mind we would do better if we competed with the slave wages of Mexico$1.90hr or China $.33hr.
Of course in the last 8 years we had a president that kept telling us that the economy was great while our jobs were leaving the country!
On Jun 24 08:41 AM Stephen Metzger wrote:
> It is depressing to see the ignorance of many of the respondents
> to Mr. Brouwer's article. His example of California vs. Michigan
> is meant to describe the economic benefits of trade and they, as
> he says, are fully applicable to international trade. You cannot
> hide this fact by saying the difference is that we are Americans
> and those others are "fereners". Trade restrictions only benefit
> special interests, placate the ignorant, and lower living standards.
> And, Mr. Brouwer is also right in comparing current trends with those
> of the 1930s. We are repeating the same mistakes of that decade in
> both domestic and international policy. Of course, we have a President
> who has little understanding, much less appreciation of American
> history--even recent history. (Nothing important occurred until he
> was born, and even then, some very unimportant things happened, because
> he was only nine years old.)
lets lower our wages and get rid of benefits...and then we'll have the buying power that the rest of the third world countries have.
AS WE'RE FORCED TO COMPETE WITH THEM WE'LL BECOME LIKE THEM...CONGRATULATION.... BLOWING THE CANDLES!!
On Jun 24 10:55 AM Zudar wrote:
> Buy American, pay $1000.00 to $1500.00 for a DVD player, but still
> have to get most parts from over seas. We have put ourselves into
> this position by letting the Unions dictate what they get to make
> things. Letting the greed of Wall Street run wild and killing our
> sources for making products. Now it to late to say "Buy American."
> Maybe back in the early 70's we could have done something, but now
> we're locked into this mess. GREED is the real monster.
> Once we get cost and wages under control and break or regulate the
> Unions then it will change. Our Govenerment is only looking out for
> there pocket books, not what is really needed. The world is tied
> together now and we have to work together or fall together. Lets
> hope that we can handle the coming storm, and be ready to pay high
> dollar for all goods. the other countries are getting ready to stick
> it to us.....
On Jun 24 08:41 AM Stephen Metzger wrote:
> It is depressing to see the ignorance of many of the respondents
> to Mr. Brouwer's article. His example of California vs. Michigan
> is meant to describe the economic benefits of trade and they, as
> he says, are fully applicable to international trade. You cannot
> hide this fact by saying the difference is that we are Americans
> and those others are "fereners". Trade restrictions only benefit
> special interests, placate the ignorant, and lower living standards.
> And, Mr. Brouwer is also right in comparing current trends with those
> of the 1930s. We are repeating the same mistakes of that decade in
> both domestic and international policy. Of course, we have a President
> who has little understanding, much less appreciation of American
> history--even recent history. (Nothing important occurred until he
> was born, and even then, some very unimportant things happened, because
> he was only nine years old.)
On Jun 23 02:48 PM Dave Wrixon wrote:
> Yeah, well don't worry it goes deeper than that. Since Obama put
> that clause in the Legislation, I won't buy anything American unless
> I cannot get something else of similar quality for a similar price,
> and the UK hasn't even had to act to get that to happen. France has
> often suffered at the hands the UK consumer. They prevent import
> of lamb, and the middle classes start buying New World Wines and
> home produced cheese. No legislation needed.
.
The illusion that all countries of the world are putting their own countries at a position of disadvantage in order to serve the god of Free Trade is a joke.
The US government is giving money to Nissan (Ford, and Tesla) to develop electric cars. Does Nissan really need money from the US taxpayers to develop an electric car? Is the profit motive not enough?
Protectionism is a 'stage' in the contraction of capital, as are foreign wars. It is NOT a pleasant stage. But, like Winter, there's not much you can do to change it.
The notion that the Great Depression could have been avoided or diminished into a 'common recession' is based on the illusion that a common cold and cancer are related and that cancer is caused by the doctor who mishandles his treatment of the common cold.
A recession is a supply and demand problem -- supply outpaces demand, and layoffs are required to slow down production so that demand can catch up: this is the common cold.
A depression is a debt imbalance. The consumer cannot afford to take on more debt. Depressions follow a feeding frenzy of cheap-money lending and take years to unwind. Depression is a kind of cancer that it most times fatal to banks, governments and many corporations, to say nothing of middle- and working-class workers.
We have just been through 18 years of a class-war in which the government was on the side of the rich against the poor. We are now entering 18 years of a class-war in which the government will be on the side of the poor against the rich. Day and night.
Class war which favors the poor: 2001 - 2019
Class war which favors the rich: 1983 - 2001
Class war which favors the poor: 1965 - 1983
Class war which favors the rich: 1947 - 1965
Class war which favors the poor: 1929 - 1947
Perhaps we're just waking up. Maybe being a debt-slave is not the best use of the life we have here on earth.
On Jun 24 08:27 AM Stephen Metzger wrote:
> Your suggestions amount to the same thing: A restriction on trade.
> We are repeating the errors of the 30s at home and abroad. Bring
> on the war (I don't mean trade war).