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Michael Wolraich's picture

Don't Raise the Barricades

A recent World Bank study indicates a disturbing rise in trade protectionism around the world in response to the economic crisis. Here are a few examples:

  • Russia raised tariffs on used autos
  • Ecuador raised tariffs on more than 600 items
  • Argentina imposed non-automatic licensing requirements on auto parts, textiles, TVs, toys, shoes, and leather goods
  • Indonesia restricted imports of garments, footwear, toys, electronics, food and beverages to only five ports and airports
  • China banned Irish pork, Belgian chocolate, Italian brandy, British sauce, Dutch eggs and Spanish dairy products
  • India banned Chinese toys
  • The EU announced new export subsidies on butter, cheese, and milk powder
  • China and India have increased the rebate on the duty drawback system for exporters
  • The US, Canada, France, Germany, United Kingdom, China, Argentina, Brazil, Sweden, South Korea, Portugal and Italy have offered subsidies to domestic automobile and automotive component manufacturers
  • The stimulus bill passed by the US House of Representatives would provide a 25 percent competitive margin for US iron and steel for all expenditures under the bill, though the Senate version stipulates that the provision "be applied in a manner consistent with United State obligations under international agreements" which would exempt the EU and 12 other countries that have signed trade deals with the US

The chief problem with protectionism is that it's never unilateral. When one trade partner raises barriers, the others inevitably respond in kind, undermining both the targeted industries as well as unrelated industries that suffer from the foreign retaliation. The result is a decline in international trade, which can have a devastating effect on the world economy.

In 1930, the Smoot-Hawley Tariff Act created just such a cascading effect, leading to a 66% decline in world trade between 1929 and 1934. When the tariffs were enacted in 1930, American unemployment was at 8%. In 1931, it was 16%. In 1932, it was 25%. While correlation does not prove causation, most economists blame the tariff act for counter-effectively damaging US manufacturers and significantly contributing to the Great Depression. Let's not make the same mistake again.

How can you blame Smoot-Hawley?  That 66% decline in world trade was a decline from 6% of GNP to 2%.  4% decline was too small to live up to the billing.  More important the United States became a tariff protected economy in 1828 and was such until after World War II.  In fact from 1828 until after World War II U.S. tariffs seldom went below 30 percent and were as high as 62 percent.  Tariffs from the end of the Civil War to the end of the century were higher than they were in the 1920s and 1930s. Free traders have a large list of bad things that is supposed to happen to tariff protected economies but the United States never experienced them during the more than a hundred years in which we were a tariff protected economy.  If protection is bad how did the United States make the transition from a producer of raw materials and agricultural products in 1828 to an industrial power by the end of the century? 

 

Free trade, not protection, has got the United States into the current mess.

That 66% decline in world trade was a decline from 6% of GNP to 2%. 4% decline was too small to live up to the billing.

A 4% drop in the GNP, most of it concentrated in manufacturing is massive. Economists debate how much SH contributed to the Depression, but there's widespread consensus that it was a significant factor. I don't know enough to measure the impact, but I'll stick with the experts.

More important the United States became a tariff protected economy in 1828 and was such until after World War II.

Growth is not impossible with tariffs. An economy can grow without any exports at all. But trade encourages growth and trade restrictions discourage it. 19th century growth was built on large-scale immigration and revolutionary technological innovation. We no longer have those drivers.

Free trade, not protection, has got the United States into the current mess.

Unregulated financial markets got us into this mess.

Back in the day, I opposed the North American Free Trade Agreement, mainly because it put big business on a legal par with elected governments. That still rankles, and it's still a thorny problem that needs fixing. But it's hard to argue that NAFTA didn't stimulate trade, boosting Canada's economy in the process.

There are still a surprising and annoying number of things that cross-border shoppers have to pay import duty on. Plus subsidies and price floors, such as those for Quebec milk producers, remain -- though I believe they are supposed to be phased out.

But NAFTA does constrain the worst forms of protectionism, as well as arbitrary, punitive tariffs like the 300 per cent George Bush levied on Roquefort cheese the week he left office. It's retaliation for a European Union ban on hormone-treated beef.

That tariff was supposed to kick in yesterday, but the White House has delayed it a month while trade negotiators seek a compromise. I don't see the EU bending, so if you like your sacré bleu, better stock up now. Unless your bailout money just came through, in which case paying $70-$100 a pound for cheese should be no problem.

I think that there's too much polarization in trade discussions. People seem to fall into free-trade good and free-trade evil camps. The former support international agreements that allow unfettered trade. The latter oppose all international agreements that lower trade barriers. But international trade is like any other market. Constraints and regulations hinder growth, but lack of regulation leads to product and labor violations and unhealthy extremes. What we need is rational regulation that allows trade to flow without anticompetitive restrictions but checks harmful excesses.

One cause of the polarization is the ambiguity between rational regulation and anticompetitive restrictions. Does Europe's ban on hormone-treated beef constitute product safety or protectionism?

I'm not really sure where I'm going with this. Basically, it's a long winded way of agreeing with your point about NAFTA constraining protectionism and "arbitrary, punitive tariffs" without embracing unfettered trade.

Yeah, I think their ban on hormone-treated beef is not protectionism per se. They don't ban Canadian beef, except when we have the occasional mad-cow outbreak. And who doesn't, from time to time?

I think the rationale is mixed. For the European politicians it's a win-win, pleasing both consumers and producers. The scientific evidence, however, doesn't seem to support their position.

Due to the power of agribusiness on both continents, there's no way for the governments involved to produce unbiased legislation. So adherence to the WTO is critical. Unfortunately, the WTO's Solomonic decision last fall essentially sanctioned a trade war, allowing Europe to continue the ban while it appeals the WTO's rejection of their scientific claims and the US and Canada to impose retaliatory measures, hence the tariff on Roquefort cheese.

A relevant digression. When I debated in high school, I ran a case to ban the import of Canadian pork due to the use of the antibiotic, chloramphenicol, which can cause aplastic anemia in rare cases. It was a beautiful case because it was so obscure that none of my opponents had any evidence against it. Some of them tried to argue that it would spark a a catastrophic trade war, but all their trade war evidence was specific to Europe, not Canada. I almost won a tournament with it, but we lost in the finals to a Communist counterplan. Our opponents argued to the judges' satisfaction that our plan would interfere with a Communist revolution, which was apparently necessary for global happiness and to avert nuclear war. That's why high school debate is stupid.

I think that Canada has since banned the use of the antibiotic.

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