Tuesday, January 18, 2011

Smoot-Hawley Argument Imports Red Herring

Comment on an article in Seeking-Alpha, “Free Trade: The Big Issue for Green Energy in 2011”:

Well said, Mr. Kanellos. Your detractors always seem to mention Smoot-Hawley, as though the economic malaise that followed enactment of that law proves conclusively that wide open free-trade with trading partners who mock every notion of free trade is the best thing that could possibly happen to the US economy.

You need only glance at the current state of the US economy and the decimation of our manufacturing sector -- along with the unions and the middle class it supported -- to see that we are heading into something substantially worse than what followed Smoot-Hawley (the Great Depression). But suggesting that Smoot-Hawley precipitated or even greatly worsened the Great Depression is specious.

Further, the most prosperous periods of US history (for industry, not speculators) occurred during the late 19th century and early to mid 20th century, when the US did impose tariffs on imports. (http://internationalecon.com/Trade/Tch20/T20-3.php)

Here's some fun quotes from Wikipedia:
Hawley & Smoot, 1929
Using panel data estimates of export and import equations for 17 countries, Jakob B. Madsen (2002) estimated the effects of increasing tariff and non-tariff trade barriers on worldwide trade during the period 1929–1932. He concluded that real international trade contracted somewhere around 33% overall. His estimates of the impact of various factors included about 14% because of declining GNP in each country, 8% because of increases in tariff rates, 5% because of deflation-induced tariff increases, and 6% because of the imposition of nontariff barriers. [So, Madsen concludes that of the total 33% international trade reduction, 8% was due to increased tariffs in many countries, not just the U.S. :completelybaked]
The new tariff imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the United States," quadrupling previous tariff rates.
Imports during 1929 were only 4.2% of the United States' GNP and exports were only 5.0%. Monetarists such as Milton Friedman who emphasize the central role of the money supply in causing the depression, downplay the Smoot-Hawley's effect on the entire U.S. economy.
However, (after Smoot-Hawley was repealed) the American Tariff League Study of 1951 which compared the effective tariff levels of 43 countries found that only seven countries had a lower tariff level than the U.S. (5.1%). Eleven countries had effective tariff rates higher than the Smoot-Hawley peak of 19.8% including the United Kingdom (25.6%). The 43-country average was 14.4% ± 0.9% higher than the U.S. level of 1929.

I do not suggest blanket tariffs of 60% on ALL imports! What I do suggest are tariffs on imported goods that are illegally subsidized, and manufactured in conditions that do not meet minimal environmental and worker safety standards. It's not like we will export much less. We hardly export anything now, anyway (except trash and raw materials, like coal and timber). Tariffs will give us a chance to restore our manufacturing base, and the good, union jobs that go with it.

There's lots of ways to interpret history, but I don't think what has happened to US manufacturing, and the middle class as a result of “free” trade are particularly ambiguous.

So, call me a mercantilist. 

No comments:

Post a Comment

share your thoughts...