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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History of U.S. Tariffs

April 3, 2012

http://en.wikipedia.org/wiki/Tariff

The above-linked Wikipedia article on tariffs includes a table of U.S. Historical Tariffs, from 1792 through 2010.  It’s interesting to see how the steady decline in tariffs, especially beginning with the signing of the Global Agreement on Tariffs and Trade (GATT) in 1947, tracks closely with the steady demise of American manufacturing and our overall economy in general.  Don’t pay much attention to the accompanying text, since it merely repeats many of the misconceptions about tariffs that are perpetuated by free trade-cheerleading economists.  For example, there’s this:

The next peak in tariffs was due to the Smoot–Hawley Tariff Act of 1930 at the start of the Great Depression. It is generally believed this act with its high tariff rates prolonged the Great Depression under President Franklin D. Roosevelt of 1929-1939.

Look at the table again.  The average tariff rate in 1930 was 19.2%.  In 1918, just prior to the economic boom of the “roaring ’20s,” it was 31.2%.  The average tariff rate from 1792 through 1928 was 20.4%.  And we’re to believe that a tariff rate of 19.2% in 1930 “prolonged the Great Depression?”  Such a claim is completely illogical.  It doesn’t stand up to the most basic scrutiny. 

Also, take a look at the “budget % tariff” column.  Until the Civil War, when federal spending exploded to finance the war, tariff revenue accounted for nearly all of federal revenues.  It fell to less than 50% during the Civil War but recovered to 57% of the federal budget by 1890.  Following ratification of the 16th amendment in 1913, authorizing the federal income tax, tariff revenue as a percentage of the federal budget steadily declined, reaching a record low of 0.9% in 1944, where it has remained (approximately) since. 

In 1948, the year following the signing of GATT, tariff rates fell by 30% to about 5.5%, where they remained until 1975, when they were cut in half.  Not coincidentally, the U.S. has run an ever-growing trade deficit ever since that year. 

Near the bottom of the Wikipedia article, in a discussion of the neoclassical model of trade and tariffs, comes this frank admission:

In the real world, as more imports replace domestic goods, they consume a larger fraction of available domestic wages, moving the graph towards this view of the model (where consumers are also producers and their purchasing power comes from wages earned in production). If new forms of production are not found in time, the nation will go bankrupt, and internal political pressures will lead to debt default, extreme tariffs, or worse.

Sound familiar?  Our national debt is rising at a rate of $1 trillion per year.  Last summer we came as close to defaulting on our debt as the nation has ever come.  Is “extreme political pressures” for “extreme tariffs” next?  One could only hope.  Otherwise, the “or worse” will soon follow. 

 

 


Protectionism Had Nothing to Do with The Great Depression

February 13, 2009

http://www.reuters.com/article/ousiv/idUSTRE51C2FG20090213

Like other free trade shills, German Finance Minister Peer Steinbrueck, in advance of a G7 meeting in Rome, is raising the specter of The Great Depression, which he disingenuously blames on protectionism.  It’s time to set the record straight.  Protectionism had nothing to do with The Great Depression.

The free traders always begin their revisionist history of the cause and effect relationship between protectionism and the depression with the passage of the Smoot-Hawley Tariff Act, as though Smoot-Hawley represented some foolish turn away from free trade toward protectionism, triggering a global trade war that plunged the world into depression.  Nothing could be further from the truth.

First of all, at the time of passage, Smoot-Hawley was only the latest in a long history of tariff legislation successfully employed by the U.S. to maintain a balance of trade.  The previous Fordney-McCumber Tariff Act of 1922 had set the ad valorem tariff rate on a wide range of products at an average of about 38.5%.  “Ad valorem” basically means “percentage.”  Tariff rates were always set in terms of percentages.  This meant that the customs people tasked with enforcing the tariffs had to then translate these ad valorem rates into dollar amounts, starting a contentious process of determining the real value of the import so that the ad valorem rate could be translated into dollar terms.  They complained about all the hassle and pressed for legislation that would set the tariffs in dollar terms. 

This was the whole purpose of Smoot-Hawley, to merely streamline the way tariffs were set, aiming to keep the ad valorem rates about the same, but saving the customs people all of the hassle.  They did a pretty good job.  By the time that Smoot-Hawley was enacted, the average ad valorem rate on the same basket of commodities had risen to 41.1%, only 2.6% higher than under the previous Fordney-McCumber Tariff Act.  And since the dollar value was fixed, it was anticipated that inflation would slowly reduce the ad valorem rate.  What no one anticipated was the deflationary spiral of The Great Depression, something that had never before happened.  Then, since the rates were now set in fixed dollar terms, the effective ad valorem rates rose.  The main lesson to be learned from this is that tariffs should always be set in ad valorem terms. 

Free traders would also like for you to forget that Smoot-Hawley wasn’t even signed into law by Hoover until June of 1930, a full eight months after the October, ’29 stock market crash.  Now it doesn’t seem so likely that a turn toward protectionism is what caused The Great Depression, does it? 

Nor do free traders want you to know how little a decline in trade actually factored into the depression.  At the height of the depression in 1933, America’s trade balance had declined $0.67 billion, contributing only 2% to an overall decline in GDP of $33.1 billion (from its previous high of $101.4 billion in 1929).  The fact is that it was the depression that caused the decline in trade, not vice versa.  We’ve already seen this same thing in our current recession.  Our trade deficit has dropped precipitously – by a third – in the past few months, as has global trade in general.  Once again, it has been the recession that has caused a decline in trade. 

In fact, it could be argued that it was an over-reliance on free trade that has triggered this recession (depression?).  Thirty-three straight years of a trade deficit that totals $9.2 trillion has literally bankrupted America, and the downward pressure on incomes resulting from the destruction of our manufacturing sector is the real root cause of the explosion in foreclosures that triggered the global financial collapse. 

Of course, nations like Germany, Japan, China, Korea and others, all beneficiaries of huge trade surpluses with the U.S. and eager to sustain the parasitic relationship they enjoy with their host, the U.S., want you to forget all of this.  Don’t be fooled.  It’s the enormous imbalances of global trade that have gotten us into this mess and it is only a return to sensible trade policy designed to restore balance that will get us out of it.


“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.