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DAVID KRUSE

By Staff | Nov 19, 2010

I was surprised when watching Chris Matthew’s Hardball College Tour program over the response from college students to the question of what they wanted Congress to do.

He went down the line from student to student and calls for more protectionism came up in their answers again and again. It made me wonder if they taught economic history at that university.

In terms of today’s place in the economic cycle and the pressures being put on the U.S. workforce from foreign competition, it is totally understandable that people would feel threatened, blaming the economic woes being experienced on trade.

Just a decade ago, 32 percent of Americans disfavored free trade agreements. 3 years ago the anti-trade sentiment grew to 46 percent and in a recent poll, protectionist sentiment reached 53 percent, a simple, but complicated majority.

The Smoot-Hawley Tariff Act, enacted in 1930s, reflected exactly the kind of sentiment that exists today to similar underlying economic conditions. Smoot-Hawley didn’t cause the Great Depression, but it did prolong and deepen it.

Congress is not going to enact tariffs on trade today, but other similar actions can occur that would have the same effect in deepening and prolonging the current recession.

The U.S. and world economies are vulnerable. China is benefiting from a sub-valued currency which is a source of great friction to which the final result has not yet been recorded.

It was Republicans who passed Smoot-Hawley in the 1930s over the objections of thousands of economists who signed a letter telling them not to. The political pressure, however, was too great for politicians not to respond, even if doing the wrong thing.

A significant percentage of the U.S. workforce is in pain and if not hurting, is at least uncomfortable. The world and U.S. economy benefits from trade. Trade is a trade off.

Countries accept losses in sectors they are inefficient at or lack resources to produce to gain market access to sell what they are best at producing. There is no real example in the world of trade being bad.

Most trade retaliations backfire. Farmers did not benefit from the Smoot-Hawley Tariff as intended. World trade contracted so there was less money to buy grain.

The WSJ wrote, “Though some still claim that trade sanctions on China would create jobs in the U.S., the more likely effect would be to send those jobs to other developing countries with low wages.

The Obama Administration’s punitive tariff on cheap tires from China, imposed late last year, has had no impact on domestic tire production and employment. The chief beneficiaries have been tire producers in Thailand and South Korea, whose exports to the U.S. have surged to replace those from China.”

China responded by placing duties on American poultry so the U.S. lost that trade confrontation completely. The G-20 economic summit will attempt to cool down actions by members seeking to drive down the value of their currencies to gain the edge in sales against competitors.

Yet, “if all major central banks were to intervene on foreign exchange markets to drive down the value of their own currencies, none would succeed in changing nominal exchange rates, but it would be equivalent to a world-wide easing of monetary policy.

A more relaxed monetary stance was critical to ending the Depression in the 1930s. Had it been coordinated so that exchange rates did not change abruptly, protectionism could have been kept at bay.”

That’s what they will try to do in the Seoul meeting this month. While the Obama administration has acted in a protectionist manner, its rhetoric touts expanding trade, doubling it in five years.

You can’t get from here to there with protectionist policies, expecting trade partners to accept the U.S. unilaterally deflating the dollar, shelving pending FTAs and putting tariffs on China. He knows better but the political pressure is what it is and politicians are compelled to respond.

Herbert Hoover wasn’t a dummy, but understood the impact of his mistake. Similarly, we are in the same spot in this economic cycle where mistakes can be made with huge economic consequences. It’s tough when people are hurting, but to do something they perceive is causing them more pain, it’s politically impossible.

Dartmouth College professor Douglas Irwin said that the quantitative easing planned by the Fed is necessary to avoid protectionist pressures.

“Right now, Congress is geared up to blame other countries for our jobless recovery. If the Fed were to act more decisively, it would not only help the economy, but also help to fend off protectionist measures that could do lasting economic damage.”

Those college students interviewed by Chris Matthews needed to take his class because they have a lot to learn . . . and their generation will pay the heaviest price.

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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