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
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
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.
