U.S. leading charge to close trade

Vancouver Sun ^ | Micheal Campbell

[Mr. Burns]

So let's see -- it's already propelled the Canadian dollar and virtually every other western currency to highs against the U.S. dollar, it may also be the straw that breaks the back of the U.S. equity markets, and it carries the seeds for deeper worldwide economic woes.

Not bad for a little measure that protects a few thousand jobs in the textile industry in some southern states. I'm referring to the Bush administration's imposition of trade quotas on Chinese textile imports announced Tuesday. This comes on the heels of a WTO ruling on illegal American steel tariffs that will most certainly produce trade retaliation from Europe.

While I appreciate that such news warrants barely a mention in the Canadian press, maybe if the ramifications cited above don't get your attention then the thought that one of the root causes of the Great Depression was increasing trade protectionism in the U.S. as embodied by the Smoot-Hawley Tariff Act will. The latest act of protectionism by the Bush administration, and tragically supported by many on both sides of the House of Representatives, has already resulted in the Chinese cancelling a trade summit in Chicago. That summit would have resulted in increased grain, metals and machinery exports for American producers. What's incredible is that the rationale for the new quotas is to protect an industry that has already sent 97 per cent of its manufacturing production to places like Mexico and Honduras since the 1980s.

As I wrote in this space a year ago, George W. Bush should be the darling of anti-globalists everywhere because he's leading the charge against open markets as illustrated by steel tariffs, textile quotas, increased farm subsidies, and, of course, softwood lumber tariffs. My warning to those opposed to open trade is that they had better be careful what they wish for -- they just might get it, with the results being significant layoffs, decreased economic activity and deflation.

Softwood tariffs have already led to layoffs for thousands of forest industry workers in our province, and cost jobs in the home-building industry in the U.S. Gary Hufbauer of the International Institute of Economics estimates that higher steel prices due to American tariffs have cost U.S. manufacturers 15,000 to 20,000 jobs, while other studies put the number as high as 200,000.

All of these protectionist measures represent special interest group politics at its worst. While the fallout from protectionism is felt across the broad spectrum of the economy, the benefits are bestowed upon a small, well-organized group.

The trend toward protectionism could have far-reaching negative consequences. Keep in mind that the equity market recovery that began in October 2001 ended in March 2002 with the imposition of the steel tariffs. It remains to be seen whether the same fate awaits today's equity markets, but at the very least a massive warning signal is being flashed.

As well-known analyst, Dr. A. Gary Schilling, recently wrote, "protectionism could turn the good deflation of excess supply into the bad deflation of deficient demand. Let's hope that policymakers remember what protectionism and deflation did to the world economy in the 1930s."

There is still time for the Bush administration to reverse these destructive policies and avert further damage to a fragile world economic recovery.

[Willie Green]

maybe if the ramifications cited above don't get your attention then the thought that one of the root causes of the Great Depression was increasing trade protectionism in the U.S. as embodied by the Smoot-Hawley Tariff Act will.

The assertion that the Smoot-Hawley tariff was responsible for the Great Depression is a myth based on ignorance of historical facts in favor of pursuing economic textbook theory. Smoot-Hawley was not enacted until more than 8 months after the October, 1929 stock market crash, and therefore could not have caused it.

[AgThorn]

Is anyone benefiting, other than a few special interests, in this trade war? I tend to agree with this author.

We seem to be not focused on the right strategic goals in these trade discussions (fixing the balance, i.e. more exports to China, etc.). Rather we are caught up with special interest tactical items such as an out-of-date steel industry that needs to get competitive on its own.

[Mr. Burns]

Perhaps not, but protectionism didn't help in the recovery.

[Torie]

Smoot-Hawley was not enacted until more than 8 months after the October, 1929 stock market crash, and therefore could not have caused it.

Your logic is infallible if you mean Smoot-Hawley did not cause the stock market crash. Your logic is tendentious is you mean Smoot-Hawley did not exacerbate the economic contraction.

Bush is pandering with his toe sucking act with the protectionist crowd. He will be forced to dump it all after the election, or their will be material adverse consequences, and the path will be smoothed for Hillary considerably in 2008, and the Pubbies hard won achievement of political parity will have crested, and recede.

[narses]

"...and cost jobs in the home-building industry in the U.S."

Where does this Rube get his data? Home building is roaring at a record pace.

[AgThorn]

Smoot-Hawley was not enacted until more than 8 months after the October, 1929 stock market crash, and therefore could not have caused it.

So, maybe this act DID have something to do with ending the depression?

[BrucefromMtVernon]

So-called "protectionism", along with the use of tariffs to raise revenue for the federal government, is part of what the American System of Political Economy is all about. Were the United States of America to rely on tariffs rather than an income tax to raise revenues, this in combination with "protectionist" trade policies, government incentives for massive investment in the development of cutting-edge capital goods (i.e., machine tools), massive development of essential infrastructure required by all players in a modern economy; why there would be an economic revival. What we witness today in the U.S. economy is a massive collapse of that economy: continued deterioration of infrastructure (both "hard" and "soft"), an overall collapse of the "physical plant", looting of the economy by financial predators.

[Torie]

Yep, a government command economy is splended because it is at once both economically salubrious (as has been "proven" empirally time and again above and beyond dry silly economic theories (like the pursuit of maximum economic advantage, where unfettered market signals are allowed to give a clue as to where the most value might be added)), and conducive to the citizen's exercise of his liberty to freely contract. LOL.

[ETERNAL WARMING]

Roaring? I'm sure it is...but illegals have taken over the Construction industry, so other than the fat cats, the only one who benefits is the Mexican GNP.

[Willie Green]

The Smoot-Hawley tariff actually extended the list of imports that entered the country with no tariffs at all compared to the Fordney-McCumber tariff of 1922. What the Smoot-Hawley tariff did do was raise tariffs on particular import sensitive goods, such as Canadian agriculture, that were already on the tariff list and increase the amount of goods to which no tariffs were applied.

When Smoot-Hawley passed, imports were only 4% of GDP; and two-thirds came in free. Perhaps you can explain how a marginal tax hike, on 1.3% of GDP, caused a 46% contraction of the U.S. economy, 25% unemployment, and a wipeout of 85% of stock values?

[Post Toasties]

I thought the problem here were the massive retirement benefits that the reduced US Steel industry has to pay. There's no quick fix for that one except increased business.

[WOSG]

The assertion that the Smoot-Hawley tariff was responsible for the Great Depression is a myth based on ignorance of historical facts in favor of pursuing economic textbook theory. Smoot-Hawley was not enacted until more than 8 months after the October, 1929 stock market crash, and therefore could not have caused it.

The assertion that only events during or prior to the stock market crash caused the depression is contrary to historical fact.... the great depression was a global phenomenon that lasted 10 years. Events for the whole period of time impacted the severity and duration of the economic crisis - including Smoot-Hawley tariff, including Hoover's 1932 tax increases, including the New Deal itself from 1933-1937.

For a good historical review of this whole period and ALL the factors that went into the Great Depression, I highly recommdent Jude Wanniski's "The Way the World Works". He shows the trade and tariffs "wedges" impact on economic activity 'at the margin' and how such wedges when raised or reduced greatly impact economic activity. It is particularly interesting when Jude catalogs the daily fluctuations in stock price relative to various political events. He even traces the stock market crash to an item and event - tied directly to the progress of the Smoot-Hawley bill in the Congress at the same time.

Just look at the stock market in the last 6 months since the passage of the tax cuts in late May. It is foolish indeed to think that political bills dont effect our economy. They do. It is further foolish to think that the whole great depression was somehow "inevitable" in 1929. It wasnt. Better monetary, fiscal, tax and trade policies could have shored up our economy and drastically reduced the impact of the downturn that began in 1930. It was a recession that became a depression due to Government mismanagement, and the number one act of malfeasance that worsened it was the Smoot-Hawley tariffs.

[WOSG]

"government incentives for massive investment in the development of cutting-edge capital goods (i.e., machine tools)"

what makes 'machine tools' cutting edge? And why is that more important than say drug R&D or software or construction materials or telecom services or financial markets investment???

"massive development of essential infrastructure required by all players in a modern economy"

you mean the overbuilding of infrastructure like what Japan did in the 1990s, that failed to ignite their economy but just mired them in debt? I'm skeptical.

"What we witness today in the U.S. economy is a massive collapse of that economy"

7% growth last quarter, 4% growth this year and next (projected). hmmmm.

"an overall collapse of the "physical plant","

yet factory utilization is under 80%, while productivity is going higher and higher. hmmm. doesnt sound like we are breaking down there.

Some fine rhetoric, but reall too many holes in your argument and facts to hold it together.

You're trying to build an industrial economy in the knowledge age. Look to Japan to see how that works (NOT).

The one part that makes sense for economic growth is LOWER TAXES. All the rest is a useless as doilies on formica.

[gawd]

The assertion that the Smoot-Hawley tariff was responsible for the Great Depression is a myth based on ignorance of historical facts in favor of pursuing economic textbook theory. Smoot-Hawley was not enacted until more than 8 months after the October, 1929 stock market crash, and therefore could not have caused it.

You're right, Smoot didn't cause the Depression, it only transformed it from a downturn into the worst economic period of the country.

The depression was the result of 2 things: high tariffs throughout the 1920's, beginning with the Fordney-McCumber Act of 1922, and the "easy money" policy of the Federal Reserve.

[AgThorn]

I thought the problem here were the massive retirement benefits that the reduced US Steel industry has to pay. There's no quick fix for that one except increased business.

Retirement benefits are supposed to come from properly accounted pension funds that are set forth annually. Apparently the steel industry spent the pensions?

[FirstPrinciple]

I am sorry, but how is the Great Depression related to the stock market crash of 1929?

[fourdeuce82d]

the October, 1929 stock market crash, and therefore could not have caused it.

He didn't say it did- suggested that it made a bad situation worse, and led us from a stock market crash to a worldwide depression.

[FirstPrinciple]

I heard that the price of timber has sky-rocketed. I have no first-hand data on this, but maybe people are substituting timber for something else that has kept net house-building number the same.

[WOSG]

"When Smoot-Hawley passed, imports were only 4% of GDP; and two-thirds came in free. Perhaps you can explain how a marginal tax hike, on 1.3% of GDP, caused a 46% contraction of the U.S. economy, 25% unemployment, and a wipeout of 85% of stock values?"

How is it that only a fraction of the total number of shares in a company changes hands and yet the total market value of the company can change drastically? The answer lies in the MARGIN.

From the State Dept. web site, some #s:

http://www.state.gov/r/pa/ho/time/id/17606.htm

"The Smoot-Hawley Tariff was more a consequence of the onset of the Great Depression than an initial cause. But while the tariff might not have caused the Depression, it certainly did not make it any better. It provoked a storm of foreign retaliatory measures and came to stand as a symbol of the ‘beggar-thy-neighbor’ policies (policies designed to improve one’s own lot at the expense of that of others) of the 1930s. Such policies contributed to a drastic decline in international trade. For example, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934. More generally, Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations."

So Willie we are talking about a reduction in US exports of 75%, In a mere 3 years! And a corresponding reduction in imports. This was nothing short of a global trade collapse.

Again, I urge you to read Wanniski's "The Way the World Works" to understand how tariffs could have that large an impact on trade which in turn can have a large impact on overall investment and activity in the economy.