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Trade retaliation
Feb 06, 2009

 

History provides us with great lessons in what not to do in times of crisis. Unfortunately, few remember the examples from the past.

Six weeks before the Smoot-Hawley Act (imposing high tariffs on a wide range of foreign imports) was signed into law, 1,028 U.S. economists  warned: “There are already many evidences that such action would inevitably provoke other countries to pay us back in kind by levying retaliatory duties against our goods.”

The warning issued in the petition was echoed in diplomatic communications from 24 nations after the act’s passage in the House of Representatives and prior to its debate in the Senate. The countries promised that if the U.S. enacted “beggar-thy-neighbour” protectionism, retaliation would soon follow. Despite the widespread condemnation, Smoot-Hawley passed the Senate and President Herbert Hoover signed it into law on June 17, 1930.

Retaliation was swift and onerous. The purpose of the act may have been to protect American jobs, but in the year following the 1929 stock market crash, the U.S. unemployment rate was still just 7.8 per cent, while within three years it had escalated to 25.1 per cent.  

One of the first countries to react was Canada, which imposed surcharges on 125 major American products. In 1932, Canadian Secretary of State, Charles H. Cahan, told delegates to an economic conference in Paris: “When the depression came you (the U.S.) stopped investing in Canada, and put up tariffs in the past two and one-half years so we had to do everything possible to avoid buying too much from you. We therefore put up our own tariffs and added surtaxes.”

In the end, nearly 60 nations imposed tariffs on American and foreign imports resulting in a virtual standstill on world trade.

“The Great Depression and the global trade war fed on one another to produce the most devastating economic chaos of modern times,” wrote U.S.-based Lehigh University international relations professor, Bruce Edward Moon, in Dilemmas of International Trade.

Such an interpretation is widespread among economists and historians.

Economist Allan Meltzer wrote in 1976 that the tariffs imposed by  Smoot-Hawley converted a “sizable recession into a severe depression.”

Besides the resulting economic chaos, the severity of the Great Depression led to the German unemployment rate exceeding 40 per cent, fueling Nazism under Hitler and diminishing trade prospects for Japan. This resulted  in a strengthening of militarism in that nation — the worst  bloodbath in world history ensued. In South America, the lack of exports and economic calamity resulted in more than half of the continent’s nations experiencing civil wars.

In 1944, Harry Hawkins, the deputy to U.S. Secretary of State, Cordell Hull, noting the chaos protectionism had inspired, said, “Nations which are economic enemies are not likely to be political friends for long.”

Neither Canada nor Great Britain became avowed enemies of the U.S., but increasingly cast off the U.S. as an economic partner. In August 1932, new trade agreements were signed between nations then comprising the British Empire, including Canada, during an Imperial Economic Conference in Ottawa. Britain  agreed to give Canadian goods a greater preference in its market while raising tariffs on U.S. goods. In return, Canada allowed British exporters to apply for lower tariffs. These actions were universally scorned in the U.S., as the agreement included Canadian wheat, lumber and copper — products which the U.S. had previously exported to the United Kingdom.

As the retaliatory measures piled up, Democratic presidential candidate Franklin Roosevelt blamed Republican Hoover for failing to veto Smoot-Hawley. Although the act was just one contributing factor, Roosevelt emerged as the new president of the U.S. in 1933.

The Oxford Dictionary of Economics makes an interesting point about protectionism: “Some politicians regard protectionist measures as desirable for their own sake; many who do not approve of protection still support it, as they cannot afford to lose the votes or financial support of those who demand it.”

What Oxford says was evident during the recent U.S. presidential election campaign. Touring the “Rust Belt” states, Barack Obama told the jobless he would amend the North American Free Trade Agreement to make it more favourable to American workers. When Canadian officials protested against this promise, an Obama aide assured them it was only a political ploy to win votes and NAFTA would not be up for renegotiation if Obama was elected.

Although this may not be the case —  the newly-inaugurated president has yet to bring up NAFTA — Obama’s $819-billion economic stimulus package now contains a “Buy American” stipulation tacked on by the House of Representatives. If the package gains Senate approval and becomes law, the “Buy American” stipulation could become the basis of a new world-wide trade war.

Canadian Trade Minister Stockwell Day has joined other nations in condemning what he calls blatant protectionism. Canada’s ambassador to the U.S., Michael Wilson, wrote to the respective leaders of the Democrats and Republicans in the Senate: “We are concerned about contagion, that is, other countries also following protectionist policies. If Buy American becomes part of the stimulus legislation, the United States will lose the moral authority to pressure others not to introduce protectionsist policies.” It’s a familiar warning, as it echoes the petition sent to Hoover by U.S. economists in 1930.

Based on the Buy American stipulation, U.S. politicians have failed to grasp that the free-trade policies of Presidents Reagan and Clinton led to unparalleled prosperity. And, it wasn’t free trade that ended this prosperity, but the ill-advised actions of Wall Street and a predominantly unregulated marketplace during the Bush administration, resulting in greed trumping wisdom.