Tuesday, September 15, 2009

Smoot-Hawley Redux

The decision by President Obama to impose tariffs on Chinese tire imports is a huge economic mistake. At a time when the United States should be looking to increase its international markets, the new round of tariffs threatens to decimate those markets and bring retaliatory actions against numerous U.S. products. At a time when our unemployment rate stands at nearly 10 percent, this President's policy threatens thousands more with joblessness as our international markets collapse.

This kind of short-sighted decision has historic precedent. In 1930 the Smoot-Hawley Tariff Act was enacted that raised U.S. tariffs supposedly to protect American jobs. The passage of the new law came after the stock market collapse of 1929, but also during a period when the economy seemed to be marginally recovering. The result was disastrous. World trade collapsed and the American economy collapsed with it.

You don't have to take my word for the calamity wrought by Smoot-Hawley. The U.S. Department of State says it this way: "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 drastic decline in international trade."

The Chinese tire decision appears to be history repeating itself. There are a few signs on the present horizon that economic recovery will slowly manifest itself. But the waters are perilous where the slightest mistake can have major consequences. Imposing a tariff on the nation that holds much of the international debt that the United States has obligated is not a wise choice of options. The Chinese already have announced retaliatory actions that are sure to cost American jobs. If this kind of economic warfare between two of the world's economic giants spins out of control, we have a big problem and so does the whole international community. And history suggests that just such an outcome is possible.

The additional problem is that the Obama decision is a part of a pattern of nascent protectionism. The Chinese tire policy will not be viewed in a vacuum, but will be seen in light of the Administration's refusal to back three free trade agreements which already have been negotiated. Those agreements are with three important allies, Korea, Columbia and Panama. Particularly in the case of Columbia, the protectionist stance of the Administration is undermining a relationship with a country that is directly threatened by an avowed enemy of the United States, Hugo Chavez. So, not only has the Obama White House embarked on policies that have appearance of protectionism, those policies are already having economic and national security ramifications.

The question becomes why? Why would an Administration in the throes of joblessness, deficits, debt and instability risk a tariff policy that has shown itself in similar historic circumstances to be destructive. The answer is that the only debt that counts is that which this Administration owes to the nation's labor unions. Many of the unions are unwilling to do what it takes to compete internationally, so they are content to resort to protectionism. This Administration is their policy tool and the consequences could be significant.

Smoot-Hawley was a national and international economic disaster. Those who do not appreciate history are condemned to repeat it.

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