More Trade War Hysteria

April 7, 2018

https://www.cnbc.com/2018/04/04/one-of-the-biggest-us-trade-wars-of-the-past-had-a-tragic-consequence–heres-what-happened.html?recirc=taboolainternal

I was hoping to spend some time tallying the U.S.’s global trade results for 2017, but then this popped up and I just can’t let it pass.  Actually, I was wondering when the free trade globalists would dredge up the subject of the Smoot-Hawley Tariff Act of 1930, blaming it for the Great Depression, as they usually do.  But the writer of the above linked article, in an apparent attempt to ratchet up fears of a trade war, goes a step further and blames Smoot-Hawley for World War II!

She begins by creating the impression that Smoot-Hawley was an opening salvo in a trade war in the 1930s.  She either doesn’t have a clue, or is intentionally trying to mislead her readers.  Let’s get some facts straight.  First of all, the use of tariffs was standard trade policy for the United States since its founding.  In fact, until 1913, there was no need for an income tax in the U.S. because all federal revenue was derived from tariffs.  The Smoot Hawley Act was nothing more than a minor tweak of tariff rates that had been in effect since the Fordney-McCumber Act of 1922.  It increased tariffs on average by 2.7%.  It changed the tariff basis from an ad valorem (percentage) basis to a fixed dollar basis which, under normal circumstances, would actually have slowly reduced tariffs as inflation eroded the value of the tariff.  But, of course, the Great Depression resulted in a protracted term of deflation instead of inflation.

Blaming Smoot-Hawley for the Great Depression is bad enough.  Not only was the change in tariff rates minuscule, but it wasn’t enacted until June of 1930, a year-and-a-half after the stock market crash of 1929 which actually precipitated the Great Depression.  And at the height of the Great Depression in 1933 when GDP (gross domestic product) had fallen by 33%, or $33.1 billion from its 1929 level, the total value of imports and exports had declined by only $6.5 billion.  It was actually the Great Depression that caused the drop in trade, and not the other way around, just as the “Great Recession” that began in 2008 resulted in a sharp decline in trade.

To blame Smoot-Hawley or a “trade war” that didn’t even exist for World War II is truly outrageous.  It was actually the aftermath of World War I and the severe war reparations that were imposed on Germany, resulting in soaring inflation and unemployment, that fostered Hitler’s rise to power.  And that just happened to coincide with the growing aggressiveness of imperialist Japan.  Trade had absolutely nothing to do with it.

Sure, the world made a turn toward free trade following the war with the signing of the Global Agreement on Tariffs and Trade in 1947, but it wasn’t because anyone blamed a “trade war” for causing World War II.  It was because economists, eager to try out the concept of free trade, successfully (but disingenuously) blamed tariffs for the Great Depression and made an argument that the interdependence that would come with free trade could preclude any future world wars.

Actually, if one were to be honest, free trade and the enormous global trade imbalances it has fostered is directly responsible for our current trade tensions.  We need to restore balance to global trade through the use of tariffs or quotas before things get any worse.

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“Free” Traders Resurrecting Specter of Smoot-Hawley and Great Depression

December 2, 2008

http://www.time.com/time/world/article/0,8599,1862927,00.html?xid=feed-rss-netzero

Here they go again. “Free” trade cheerleaders, led by the parasitic economies of the world, resort once again to fear tactics to blunt the rising tide of protectionist sentiment in the U.S., and their favorite is resurrecting the specter of the Smoot-Hawley Tariff Act of 1930 and blaming it for the Great Depression.

While Harry Reid, Nancy Pelosi and other Congressional Democrats mull an auto industry bailout plan, it’s worth recalling a pair of Republican legislators from the past. Among the most derided pieces of 20th century economic policy was introduced by Senator Reed Smoot of Utah and Rep. Willis C. Hawley of Oregon. Signed into law on June 17, 1930, the notorious Smoot-Hawley Act jacked up U.S. tariffs on more than 20,000 imported goods, sparking a global trade war that deepened the Great Depression at home and spread it abroad.

If you had little knowledge of the history of U.S. trade policy, the above paragraph would lead you to believe that Smoot-Hawley was our first foray into tariffs, that it destroyed global trade and that it was the trigger for the Great Depression. Nothing could be further from the truth.

First of all, Smoot-Hawley wasn’t even passed by Congress and signed into law until a full 8-1/2 months after the October 29, 1929 stock market crash. The Great Depression was already well underway by the time Smoot-Hawley was passed.

Secondly, Smoot-Hawley was nothing more than another in a long line of tariff acts. The U.S. successfully employed tariffs for 153 years before Smoot-Hawley, protecting domestic industry and building itself into the world’s preeminent industrial power and its wealthiest nation. Smoot-Hawley raised tariffs only slightly, on average by about 3%, over the previous Fordney-McCumber Tariff Act of 1922, which was widely credited for the success of the American economy during the “roaring ’20s.” The following is a comparison of the “ad valorem” tariff rates of the two acts at the time that Smoot-Hawley was passed, taken from Chapter 8 of my book, Five Short Blasts:

table-8-1-equivalent-ad-valorem-rates1

Third, at the very height of the Great Depression in 1933, the U.S. balance of trade had eroded by only $0.67 billion, contributing only 2% to an overall decline in GNP of $33.1 billion. The following table shows how key economic indicators, including GNP, the consumer price index, exports, imports and unemployment tracked as the Great Depression progressed from 1929 through 1940.

table-8-2: Economic Indicators During the Great Depression

When you see the above data, you realize how laughable it is to suggest that Smoot-Hawley had anything to do with the Great Depression. If anything, it was the Great Depression that caused the decline in trade. As another example of that, consider our most recent trade data for last month. We’re already seeing significant declines in both exports and imports, not because of any tariff acts but because the whole global economy is in recession.

Now, Smoot-Hawley was not without its faults. Prior tariff acts always set tariffs at an “ad valorem” rate, which simply means they were set at a fixed percentage of the value of the product being imported. Establishing that value was a contentious, time-consuming process. So Smoot-Hawley tried to simplify things by setting the tariffs in dollar terms, never anticipating the deflationary downward spiral of the Great Depression. As prices spiraled downward, the effective ad valorem rate of the new tariffs, since they were in fixed dollars, soared. So the rest of the world ratcheted up their tariffs as America’s ad valorem rates climbed. Certainly this had a chilling effect on global trade. But since imports declined at about the same rate as exports, the net effect on GNP was negligible. (Something else that “free” trade cheerleaders would like for everyone to foget is that imports are a net drag on GDP. They only want you to focus on exports.) So the only real lesson from Smoot-Hawley is that tariffs must always be set in ad valorem terms, just like the tariff structure I’ve recommended in Five Short Blasts.

These final excerpts from the article merit comment:

The E.U.’s competition commissioner Neelie Kroes cautioned European lawmakers against propping up domestic companies. “All governments,” she said, “have to resist that.” As history teaches, when attempts to protect national economic interests lead to a trade war, everybody loses.

That’s what the people with the trade surplus, which describes the E.U., want you to believe – that everybody loses – when, in fact, it’s impossible for the country with the trade deficit to lose. We’re already in a trade war. We’ve been in one for decades and have been losing badly because we don’t have the guts or common sense to even put up a fight. What history actually teaches us – the more recent history of the past few decades – is that a nation that runs a permanent trade deficit will eventually face economic collapse.

So when you read about someone raising alarm about “protectionism,” ask yourself “What’s the motivation of this person?” Is this someone who benefits by sustaining a trade deficit with the U.S.? If it’s an American politician, are they someone who is supported by companies who have benefited by outsourcing jobs? Are they really interested in a healthy American economy or are they interested in protecting an export business to the U.S.? Or ask yourself why the World Trade Organization actually enforces protectionist tariff policies in favor of developing nations. If tariffs actually help such nations develop their economies, why are they bad for the U.S.? Most importantly, ask yourself how a $700 billion per year trade deficit could possibly be a good thing, and how eliminating it could possibly be detrimental?

Don’t accept these lies about protectionism and tariffs at face value. Do your homework and decide for yourself whether America was better served by the protectionist trade policies of the first 171 years of our nation’s history or the free trade policies of the past six decades.