In 1930, Congress enacted and President Herbert Hoover signed the Smoot-Hawley Tariff Act into law. The country was hurting economically and the Act was designed to block imports so that domestic industries would benefit.
The tariffs spread trade disruption like a disease epidemic. Trade partners reciprocated with trade barriers of their own, resulting in a collapse of world trade. The impact was domestic, as well.
Claims that the tariffs would raise the standard of American labor and American wages proved grossly inaccurate. What the tariffs did was deepen the depression, expanding its breadth instead of relieving it as was intended.
Economists often get made fun of, but 1,000 of them petitioned Washington not to enact the tariffs, but the politicians responding to their constituents who were suffering economically, could not resist the political pressure.
Dr. Douglas Irvin, who wrote the book, “The Smoot-Hawley Tariff and Great Depression,” noted that trade partners always retaliate for protectionism.
“America’s trading partners, notably Canada, did not turn the other cheek. Outraged at being kicked out of the U.S. market, the pro-American Canadian government retaliated against U.S. exports. Anti-American sentiment allowed the pro-British conservatives to win a general election there just weeks after the tariff took effect. They retaliated again.”
History is repeating itself. The economic stress represented by the global financial crisis and U.S. unemployment and the political response to it has brought the liberalization of global trade to a dead halt. “Free trade” is now perceived negatively.
There are trade inequities. The EU uses the precautionary principle to control sensitive imports. India protects its agriculture with high tariffs. China’s currency is undervalued. This is all bait for a trade war and there is strong political sentiment in the U.S. to strike back.
The U.S. Congress seated in Washington today is a protectionist Congress. Given free rein, it would pass something similar to Smoot-Hawley in a heart beat and worsen the Great Recession we are in, mimicking the 1930’s protectionism.
While many world leaders claim to be enlightened to the need to dampen protectionist ardor, when their constituents are hurting, trade becomes a scapegoat, something to blame, giving politicians a lever to pull, even if it is a trap door.
Pending free trade agreements with Columbia, South Korea and Panama are frozen in place – placed in purgatory by inaction. The EU and other trading partners are taking advantage of this.
The Wall Street Journal noted, “In the nearly three years after the U.S. and Columbia signed their pact (the one still sitting in Congress,) Columbia ratified a deal with Brazil, Argentina, Paraguay and Uruguay. Since then, the U.S. has lost 31 percent of its share of the Columbian market in products such as wheat and corn, while Columbia’s new trade neighbors have increased their share by 22 percent. Canada just approved its own Columbian deal, guaranteeing its products instant advantage over ours.”
President Obama understands the trade dilemma, proposing doubling U.S. exports in five years. That’s not going to happen with the Congress that he is now working with.
He is weak in ability to push his political constituency that is inherently protectionist toward freer trade. U.S. Trade Representative Ron Kirk said, “We’re going to do everything we can to bring them forward as soon as it makes sense to do so.” What he is saying is, “Why ask for a vote we will lose?”
Ironically, they are waiting for more Republicans to get elected to Congress before “it makes sense to bring them forward.”
Argentina just learned the hard way that after raising tariffs on Chinese goods, China retaliated and Argentina is now wishing it had thought twice before shooting itself in the foot, challenging China. The U.S. is selling a lot of soyoil to China that they were buying from Argentina as a result. President Obama wants to double exports, but doesn’t have a clue how to get there. Expanding exports is every country’s answer to it economic problems the world over.
The problem is that they cannot all do it at once. The market is not big enough, particularly if foreign budgets now move toward austerity. They are all just dreaming.
The U.S. hasn’t had the real attitude of an exporter on its best day. When Japan wanted its beef from cattle tested for BSE, we said, “No,” and that kind of response is repeated over and over as we want to sell what we want to sell how we want to sell it and the buyer must comply. If Japan wanted beef from cows painted purple, Brazil and Australia would accommodate them. The U.S. has not adopted such an export mindset.
For too long, the U.S. looked to export its surpluses rather than produce specifically for export. The global economic environment is now in a period of high risk for trade tension, wounding the world economy and prolonging the time to recovery.
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.
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