The More Things Change The More They Stay the Same

Trade War, Anyone?

The Preacher in Ecclesiastes tells us that there is nothing new under the sun. Same old, same old. Deja vu rules.

There have been discussions recently over the risks of a recrudescent protectionism and the damage this is likely to do to the world economy. Adam Smith has posted on this here, under the rubric "The Ghosts of Smoot and Hawley Walk Amongst Us". The reference, of course, is to the disastrous law passed in the US in the depths of the Great Depression which made the situation in the US and world-wide worse many times over. There are signs that the same disastrous error is about to be made again.

For those unfamiliar with Smoot and Hawley, a brief synopsis from Wikipedia is useful.

The Smoot-Hawley Tariff Act (sometimes known as the Hawley-Smoot Tariff Act) was an act signed into law on June 17, 1930, that raised U.S. tariffs on over 20,000 imported goods to record levels. In the United States 1,028 economists signed a petition against this legislation, and after it was passed, many countries retaliated with their own increased tariffs on U.S. goods, and American exports and imports plunged by more than half. In the opinion of some economists, the Smoot-Hawley Act was a catalyst for the severe reduction in U.S.-European trade from its high in 1929 to its depressed levels of 1932 that accompanied the start of the Great Depression.

The Smoot-Hawley Act started a trade war, which in turn damaged substantially all the major economies in the West. But, equally as sinister was President Hoover signing into law the "Buy America Act" in 1933. Now, we in New Zealand might be permitted a wry chuckle at this point, since the "Buy NZ Made" campaign, long a favorite of the protectionist Greens who will reach for any lever or tool to reduce economic growth and prosperity, has just been dumped in New Zealand as an ignominious waste of money.

But the US version of "Buy America" under Hoover was far more serious. It required that all public spending contracts use materials and resources that were completely sourced from within the United States. It was a form of forced autarky. This measure prompted still further retaliatory measures from other nations. It took generations to reverse and substantially remove the madness. (Protectionism still lives, as the failure of the Doha trade round indicates.)

Now, just the other day, the protectionist Democrats in the House added one of those cute little hand grenade clauses in the stimulus bill. Responding to (yes, you guessed it) the steelmakers lobby group, a clause was inserted which will require that no funding will go forward for federal projects unless all the iron and steel used will have been made in the United States.

Now, if this is all that happens, the damage will be limited to the American taxpayer. They will end up paying more for federal construction projects then they otherwise would, since the US cannot produce enough steel to meet requirements. This brilliant piece of legislation will increase demand, shrink supply, and hey presto, the prices of steel and iron will rise in the US, leading to skyrocketing construction costs.

But, these things have a worrying history of spilling over. American trading partners will feel far more emboldened to enact their own trade restricting measures. "Tit for tat" is the normal consequence. International trade barriers can rise very quickly under a wave of populist nationalist sentiment, particularly when coupled with a demagogic induced fear that the crisis is so bad, governments must do--well, something!

There has been an immediate reaction in Australia--which, of course, exports steel to the US. The Sydney Morning Herald reports

that AUSTRALIA has reacted with alarm to unprecedented and unexpected "buy American steel" provisions of the new Obama Government's US stimulus package.

International anxiety that the financial crisis was poised to spark a trade war grew when it was revealed that Barack Obama's $US819 billion package to stimulate the US economy included protection mechanisms for its steel industry.

The Trade Minister, Simon Crean, last night described the "buy American" provisions of the stimulus package as "very worrying" and said he would raise his concerns with the acting US Trade representative, Peter Allgeier, in Davos.

Other American business groups have reacted against the measure, fearing a backlash that will result in US companies being excluded from participating in public spending projects in Europe, the UK, Australia and China in a "tit for tat" action.

Will this grenade survive the Senate? It is such a blatant piece of pork barelling it may well be removed in the upper house of the Congress. Will Obama sign the stimulus bill if it remains? Of course. Obama has never been a free-trade advocate.

But then the fun will start. The US government can expect to face a raft of legal actions in international courts because it will be in violation of treaties and agreements which it has already signed. One presumes that Australia, for example, will have an actionable case against the US under its free trade agreement with that country.

So, while the native instincts toward protectionism are ready to hand, there are now many more obstacles actually to effecting trade barriers than there were in the 1930's. We are fairly certain that the international howls of outrage (which have already begun), let alone the legal actions against the US in international courts, would be acutely embarrassing to Obama and Clinton, both of whom nurse globalist aspirations.