×
×
homepage logo

DAVID KRUSE

By Staff | Jul 24, 2009

The Smoot-Hawley Tariff Act of 1930 passed in May. It raised the tariffs of 890 imported goods, many being ag products.

Smoot-Hawley triggered tariff increases that depressed trade and global economic growth, worsening the depression. “Within two years, 25 countries had retaliated and U.S. foreign trade took a huge hit.

America had exported $5.24 billion in goods in 1920, and by 1932, the total was just $1.6 billion.”

Note this quote, “As for Hoover, he was determined to raise tariffs and by June 1930, when a delegation of bishops and bankers paid him a visit to ask for more public works projects amidst a tumbling economy, the President told them, “Gentlemen, you have come 60 days too late. The Depression is over.”

On June 16, he then issued a statement through the newspapers that he would be signing a bill (Smoot-Hawley) in an attempt to aid those businesses damaged by the downturn.”

As I’ve noted the stock market retraced 50 percent of its 1929 losses in 1930 and even Hoover thought that it was over when it was just getting started.

Obama is not FDR. George W. Bush was Calvin Coolidge with a little Herbert Hoover in him. Obama is positioned where Herbert Hoover was, taking over in what is to be a long recession. The U.S. economy is in 2009 about where it was in 1930. What happens next will be determined by whether the lessons of history were learned.

Today’s Democrat-controlled Congress is every bit as willing to go protectionist as was the GOP Congress in 1928.

They will come at it from different directions in trade sanctions written into a climate bill or “Buy American” provisions inserted into other measures such as stimulus bills, but the result is the same.

The fact that politicians know that something is wrong does not stop them from doing it. It is very difficult for an economy as dependent on exports as China is to suddenly switch its economy over to domestic demand without problems.

The shoe that we expect to see drop yet is some kind of trade war. This U.S. Congress isn’t any smarter about protectionism than the one that passed the Smoot-Hawley Tariff Act back during the Great Depression. While many countries talk about the need to guard against protectionism, almost all of them are taking protectionist actions.

The WTO won’t stop it. There is enough slack in WTO rules for countries to raise tariffs enough to contract global trade without triggering major violations. Protectionist sentiment grows proportional to the financial pain experienced by domestic industries until it reaches a threshold where governments respond – like with USDA dairy export subsidies.

Thresholds are set differently. Chinese trade is not governed by the Golden Rule. Russia is already way over the top on protectionism, but is not even a WTO member.

It’s the emerging countries where peasants have been transformed into consumers by economic empowerment that drove the growth of the global economy. That growth benefited U.S. agriculture greatly as millions more consumers bought food, fuel and fiber first with their new income.

The Obama administration reflects the mindset of its protectionist constituency, but as pragmatists, the administration knows that they are on the wrong path. You can only afford to be a protectionist when you are in solid financial condition, the economy is growing and times are good.

None of that exists today, so they do not have the luxury of protectionism, contracting trade and depressing the global economy further. None of the pending free trade agreements are moving forward.

U.S. catfish producers want the market closed to Vietnamese fish imports. Russia banned U.S. meat and poultry imports to force Congress to drop the Jackson-Vanik amendment, tying trade to Russian emigration. Congress blocked imports of Chinese poultry. China has responded by blocking U.S. poultry imports. Tit for tat, except we started it, Tit.

We have criticized others for not adhering to science-based decisions, arbitrarily imposing bans for pseudo-sanitary reasons. This time, we are doing what we criticized others for. A ban on Chinese poultry imports may not start a trade war, but we are asking for one with this kind of trade policy.

You can see it coming.

The next trade war may not be started by Congress, at least not our Congress. 100 developing nations, including China, are threatening to impose tariffs to balance trade accounts. That would be like shooting off a cannon in a glass house.

History says that we have entered a high-risk period when someone is going to do something very stupid, triggering a chain of events that will damage world trade relations. The idea that we learn from history so we will not repeat mistakes of the past has already been proven wrong by recent economic events.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

Please Enter Your Facebook App ID. Required for FB Comments. Click here for FB Comments Settings page