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DAVID KRUSE

By Staff | Oct 21, 2011

A Federal Reserve Bank economist said that an economy is “on a knife’s edge.” The IMF director warns that the global economy has “entered a dangerous place,” yet policy makers globally are all doing things that history says precipitate economic contractions for the same selfish reasons and responding to the same pressures that have produced disastrous results in the past.

The Smoot-Hawley Tariff Act in the 1930s did not create the Great Depression, but in a situation not that dissimilar to what we have now, when the U.S. economy was contracting and the global economy was fragile, the tariffs broke the shelves holding up all the dishes.

When the tariffs went up, the global economy came crashing down. One thousand economists wrote President Hoover to ask him not to sign the Tariff Act, but he did it anyway. Foreign competitors responded in kind, raising tariffs, and the net result was a precipitated global worsening of the recession into “The Depression.”

The U.S. and world economies are in very similar condition to the 1930’s, on a “knife edge” or “entering a dangerous phase” and the U.S. Congress is considering labeling China a currency manipulator, triggering tariffs on China’s goods.

At one time I thought these protectionist threats were bluffs, but there is actually a majority in Congress stupid enough to repeat Smoot-Hawley.

The Obama administration has been silent on the Chinese bill, unwilling to openly oppose the bill for fear of offending its union sympathizers who are the driving protectionist force in the country, and also the only wing of the Democratic Party that still embraces the President.

Obama is supposed to be a smart guy. Hoover was no dummy, but when push came to shove, Hoover succumbed to the pressures to make the wrong choice

China removed its peg to the dollar in 2005, has allowed the Yuan to appreciate, and is exposing its currency to market forces gradually and purposefully. They are doing what Washington wants, slower than Washington wants and it’s not worth worsening the recession over. It is China’s intent to let the Yuan appreciate to spur domestic consumption.

Those actions don’t warrant retribution. China has not treated the U.S. as an economic enemy, but, if we impose tariffs, China, who owns nearly $1 trillion of U.S. debt, has the leverage to make the $125 billion that the Congressional Budget Office said the Chinese currency bill would raise in revenue from tariffs over 10 years, to be one of the most expensive acts of Congress ever.

China has warned not to politicize trade, but the protectionist rhetoric resonates on the campaign trail. I was stunned when MSNBC’s Hardball host, Chris Matthews, asked students on his college tour about trade, and the response was resoundingly that trade was bad and killed U.S. jobs.

My opinion of the academic quality of that university plunged. They get an “F” on economic history. The rising support for trade protectionism is bi-partisan. Unions have joined with rank-and-file Republicans. Mitt Romney said that he would not bother to wait for Congress to act, challenging China on trade.

“In an interview on MSNBC, Romney said he saw China as an ‘economic threat’ to the United States.”

When China cheats, they should be held accountable by the World Trade Organization. Trade violations should not be tolerated, but neither do they justify a trade war that would bring the house down on the world economy.

The world economy is more vulnerable today to a contraction than in 2008 when the primary bubble that burst was the U.S. subprime mortgage fiasco.

The emerging economies in the world are not as firmly grounded as they were in 2008 to add stimulus, because of high inflation rates. Developed economies have expended all the fiscal and monetary stimulus that debt markets will tolerate.

Years ago, when the world and U.S. economies were strong, I recommended hitting the European Union so hard its teeth would rattle over its biotechnology genetically modified organism protectionism.

I said at that time that you have these rows when the economy is strong. Now is exactly the worst time possible to get into trade fights.

No sector of the global economy has benefited more from the expanded trade liberalization of the post-cold war era, than U.S. and global agriculture. We hear complaints about North America Free Trade Association and the World Ttrade Organization, but they roll off agriculture like water off a duck as the net result of the reduction in trade barriers has been enormously beneficial to the ag sector.

Any reasonable, balanced analysis shows trade liberalization has been a big win to U.S. agriculture.

We can control how we respond to protectionism practiced by others and we certainly control the protectionism that we sanction here in the U.S.

U.S. agriculture needs access to foreign consumers and foreign markets to sustain the demand trendline growth, as 95 percent of global consumers live outside the U.S. The absolute worst thing imaginable for the U.S. ag sector, today, is a trade war brought on by a lack of appreciation for historical precedence leading to a “tit for tat” trade confrontation, driven by internal politics.

The fragile economic state of the world economy has us balanced over the knife’s edge, where if trade were to slip, the U.S. ag economy would be cut to pieces.

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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