Son of the Great Depression Meets Smoot-Hawley, Jr. (Updated)

Whether the Smoot-Hawley Tariff Act actually brought about the Great Depression of the 1930’s or not I don’t think that anybody really disputes that the “beggar thy neighbor” policies undertaken by many countries including this one in response to the economic downturn aggravated the situation. You’d think we’d have learned. That’s why the protectionist measures in the stimulus plan making its way through the Congress are so upsetting:

WASHINGTON (AFP) — A new “Buy American” push in President Barack Obama’s economic stimulus plan is sparking protests about protectionism from US businesses and trading partners.

Obama has pushed for swift passage of the American Recovery and Reinvestment Act as vital to prevent the collapse of the fragile US economy as it reels from the global financial crisis.

The US House of Representatives passed an 819 billion dollar economic stimulus package Wednesday with a “Buy American” provision that generally prohibits the purchase of foreign iron and steel for any stimulus-funded infrastructure project.

The massive tax cuts and spending package has moved to the Senate, where lawmakers are working on their own version that extends the “Buy American” initiative beyond the House’s iron and steel mandates to include all US manufactured goods.

I recognize there are some who don’t see this as protectionism but as “a plan to create jobs at home to get the ailing U.S. economy back on its feet”. Po-tay-to; po-tah-to. If we have a problem with the subsidies that other countries are giving their iron and steel industries we should make our case to the WTO. We shouldn’t enact protectionist laws of our own.

Today’s economic downturn isn’t just taking place here. It’s worldwide, we continue to be a great trading nation propaganda to the contrary notwithstanding, and some of our trading partners are just itching to put protectionist measures of their own into place. Let’s not give them an excuse.

Well, then, how do we ensure that the big fiscal stimulus bill doesn’t mostly stimulate other economies? The short answer is we can’t. We can’t isolate ourselves from the rest of the world and trying to isolate our economy from that of the rest of the world is just beyond our ability. This isn’t the 1920’s.

What’s needed is a Bretton-Woods III rather than a Smoot-Hawley, Jr. Unfortunately, elites aren’t what they used to be.

Update

Washington Post

Although the legality of the Buy American provision may be in question, that might not prevent a potentially dramatic series of countermeasures by America’s trading partners if it is passed and signed by President Obama. For that reason, analysts are seeing it as a major test for Obama, arguing it could signal that the United States may be changing course from a decades-long embrace of free trade because times are now too tough to maintain that path.

Douglas Irwin in an op-ed at the NYT

Once we get through the current economic mess, China, India and other countries are likely to continue their large investments in building projects. If such countries also adopt our preferences for domestic producers, then America will be at a competitive disadvantage in bidding for those contracts.

Remember the golden rule, or the consequences could be severe. When the United States imposed the Smoot-Hawley Tariff in 1930, it helped set off a worldwide movement toward higher tariffs. When everyone tried to restrict imports, the combined effect was a deeper global economic slump. It took decades to undo the accumulated trade restrictions of that period. Let’s not make the same mistake again.

Update 2

William Buiter at FT.com

The odious US House of Representatives has tagged a Buy American clause onto the Obama administration’s $819 bn (or more) fiscal stimulus bill. If this were to become law, US federal spending would, wherever possible, be restricted to goods and services produced by US companies. The main promotor of this act of global economic vandalism was the US steel industry, but other import-competing industries have lobbied also. It is quite likely that the Buy American net will be cast even more widely when the Senate gets its turn at the fiscal stimulus act.

There is little doubt that if the Buy American provisions of the Economic Stimulus Package were to become law, this would amount to an economic declaration of war on the rest of the world. The response of the assembled non-US finance ministers in Davos made this clear. Retaliation from the EU countries and the rest of the world would follow swiftly.

There’s lots more scathing invective.

Update 3

Contrary to a suggestion in the comments concern about protectionist provisions in the stimulus bill is neither an ideological issue nor a partisan one. Here’s how Paul Krugman opened his column yesterday:

Should we be upset about the buy-American provisions in the stimulus bill? Is there an economic case for such provisions? The answer is yes and yes.

and on his blog he was careful to emphasize that he wasn’t endorsing protectionism.

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Dave Schuler
About Dave Schuler
Over the years Dave Schuler has worked as a martial arts instructor, a handyman, a musician, a cook, and a translator. He's owned his own company for the last thirty years and has a post-graduate degree in his field. He comes from a family of politicians, teachers, and vaudeville entertainers. All-in-all a pretty good preparation for blogging. He has contributed to OTB since November 2006 but mostly writes at his own blog, The Glittering Eye, which he started in March 2004.

Comments

  1. just me says:

    And this discussion is exactly why “this is an emergency, we must pass this now” arguments from Obama and the democrats are bad news.

    I guess there are some who think protectionism is a good idea, but perhaps it should be debated rather than shoved into the bill.

    I will say one thing, if Obama expects the whole world to love him and love America, the quickest way to make them hate us more is to set up a bunch of protectionist laws and rules-that gets them in their pocket books.

  2. odograph says:

    Doesn’t “Made in America” just mean final assembly now? I’m sure our trading partners understand that, or would once reminded.

    FWIW, I think the state of the banks is the much bigger problem this weekend. What’s going on, TARP I, even if wasteful, was supposed to have created stability. TARP II was slowing, at a seemingly less emergency pace.

    But suddenly bank nationalization bubbled back up as a meme in the last couple weeks, and more than one report has talked about the need for four trillion dollars to set the banks right, even now.

    If that goes, a whole lot seems small in comparison.

  3. Zuing-Dhou says:

    I could not agree more. America should continue to allow its service and manufacturing sectors be exported lock, stock and barrel to China. And once America become a smoking economic wreck, then, Mr. Schulter, you and your fellow American idiots will receive the profuse thanks of your Chinese handers.

  4. Isn”t this how the great depression began???

  5. Franklin says:

    Did you even read the first sentence?

    Anyway, I mostly agree with Dave here that this is not a good approach. The thing I would like to see is better monitoring of the goods that come to these shores, especially considering the continuous stream of dangerous junk coming out of China. If that raises the price of imported goods a little bit, I think it’s money well spent. I also think it’s fine to pressure our trade partners to improve work conditions. But this legislation appears to be designed to antagonize them, just to win over a few union votes.

  6. Dave Schuler says:

    The thing I would like to see is better monitoring of the goods that come to these shores, especially considering the continuous stream of dangerous junk coming out of China.

    From your keyboard to God’s monitor.

  7. Steve Verdon says:

    And this discussion is exactly why “this is an emergency, we must pass this now” arguments from Obama and the democrats are bad news.

    You’ve got that right. This kind of thing is just bad news. We impose trade restrictions, other countries follow suit and soon you have less trade. Less trade means less economic output. Its sheer idiocy.

    Think about this, if this were true for countries then it must be true for States. After all what is the difference between trading between say Wisconsin and Minnesota and Wisconsin and Canada? This idea that international trade is zero sum is the thinking of economic-know-nothings. Trade is usually a positive sum game. I want a loaf of bread, you want my money. If the other goods and services I could buy with that specific amount of money provide me with less benefit I buy the bread. If not, then I don’t. Thus, if I buy the bread I’m improving my situation. Conversely if the benefit you get from the bread is less than the benefit of all the other things you could buy with that money then you sell me the bread, if not you don’t. So, if the transaction takes place both you and I are better off.

    I can’t believe I actually have to write this kind of stuff out.

  8. odograph says:

    Am I really too cynical? I would have expected these provisions to be commonly in our infrastructure and defense bills. I’d expect other developed nations (Japan, France) to do the same. No?

    I’m not saying I like them, mind, just that I would have thought politicians commonly made this gambit.

  9. M1EK says:

    odograph, no, you’re seeing people go off the ideological deep end.

    There is precisely zero wrong from a trade law perspective with requiring that taxpayer money be spent on local products. That’s a very different thing than ‘protectionism’.

  10. Dave Schuler says:

    There is precisely zero wrong from a trade law perspective with requiring that taxpayer money be spent on local products. That’s a very different thing than ‘protectionism’.

    The folks at Davos are certainly reacting as though it were protectionism. Could you help me out? Could you explain why it isn’t protectionism?

    It seems to me that subsidizing domestic steel at the expense of foreign steel is protectionism whether it’s to be used for building autos or bridges.

  11. M1EK says:

    It’s not a subsidy. The people at Davos are w-w-w-w-w-w-w-wrong, Fonzie.

  12. odograph says:

    I suppose we can try to find the same provisions, say in the 2008 energy bill.

    … I found it in the farm bill which is maybe not surprising.

    … it looks like there was a “buy American” clause in an old Amtrak bill

    It’s all too hard to google, with today’s arguments clogging their weighting.

  13. Drew says:

    Trade protectionism talk – and let’s be honest, that’s exactly what this is – is dangerous. Its the sort of thing that could lead us to a debacle.

    Its the sort of rookie mistake one would rightfully have worried about with new a President with no real experience………….oh, wait. I did.