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The "Buy American" Rider...didn't we learn anything from Smoot-Hawley?

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January 29, 2009 – Comments (12) | RELATED TICKERS: A , DE , TR

Good old Reed Smoot and W.C. Hawley 

Man, the more things change, the more they remain the same.  Usher out the Replublicans who have screwed things up so badly for the past eight years and usher in the Democrats who will screw things up their own way.

The more I look at this stimulus bill, the worse it gets.  My latest problem with it comes in the form of the "Buy American" rider that it contains (see article: 'Buy American' Rider Sparks Trade Debate).  In short, this provision of the stimulus package, which is now up to a whopping $819 billion BTW, would ban the user of foreign steel and iron from use in the infrastructure projects that it pays for.  As if this provision wasn't dumb enough, the Senate version of the bill, which has not yet been approved, required all stimulus-funded projects use only American-made equipment and goods.

The old proverb "The road to ruin is paved with good intentions" (get it...infrastructure...road) is extremely appropriate here.  While the "Buy American" rider is not nearly as offensive as the infamous Smoot-Hawley Tariff Act, which raised the tariffs on 20,000 types of imported goods to a record level and created a global air of protectionism and retaliation from foreign countries that prolonged the Great Depression, it is clearly a big step in the wrong direction. 

Perhaps protectionism won't be as disastrous this time around because we hardly produce anything in America any longer, but I doubt it.  If our trade partners are offended by "Buy American" provisions like this one they will start rolling out protectionist tariffs of their own and the companies here that do actually produce things and export them will be hurt.

I was scared by Obama's anti-NAFTA rhetoric on the campaign trail, but I gave him the benefit of the doubt because one of his economists Austan (yes that spelling is correct...don't ask me why, but it is) Goolsbee gave our trade partners a silent wink hinting that we really wouldn't be that protectionist.  Even if Obama isn't, the Democrats who rammed the current stimulus package through Congress clearly are.  Apparently he does not yet have enough influence over his fellow party members to prevent protectionist clauses from being tacked on to bills.

The Obama administration is supposedly reviewing the "Buy American" rider and formulating a response right now.  Let's all hope that they can get it modified or removed.  Heck, even large U.S. industrial companies like Caterpillar and GE have come out against it.  Bill Lane the government affairs director for Caterpillar recently said this about the provision, "There is no company that is going to benefit more from the stimulus package than Caterpillar, but I am telling you that by embracing Buy American you are undermining our ability to export U.S. produced products overseas....Any student of history will tell you that one of the most significant mistakes of the 1930s is when the U.S. embraced protectionism.  It had a cascading effect that ground world trade almost to a halt, and turned a one-year recession into the Great Depression."

If I see any more protectionist measures like this passed by us or our trade partners I will quickly become much more pessimistic about the global economy than I already am.  What the economy needs least right now is a war on free trade.

Deej

12 Comments – Post Your Own

#1) On January 29, 2009 at 11:34 AM, jeffduby (22.23) wrote:

I thought exactly the same thing when I read this in WSJ last week. This is just the first step in one of the worst possible outcomes of our "stimulus"

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#2) On January 29, 2009 at 11:39 AM, kdakota630 (29.45) wrote:

Another excellent blog, Deej.

Loved your "road to ruin..." line.

On a somewhat side note regarding your related tickers, who'd have thought that a 1-star stock like The Tootsie Roll company (TR) would be break-even this year over the past 12 months?!?  Are people consoling their economic woes by indulging in Tootsie Rolls?!?

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#3) On January 29, 2009 at 12:08 PM, n6532l (< 20) wrote:

Like most who took basic economics in college I was told that the Smoot-Hawley Tariff Act made the 1930s Depression worse.  Unlike liberal arts majors who are content to quote authorities I am an engineer.  Like most engineers I am not content to let others do my thinking.  I will check for myself if I can.   After doing my own checking I conclude that the Smoot-Hawley claim will not hold water.  It does not explain the Great Depression but serves as a "boogieman is going to get you" scare tactic to support free trade.

 

It is an article of faith among free traders that the Smoot-Hawley Tariff Act prolonged the Great Depression. One hardly hears any claim to the contrary bring to mind Lenin's famous quote "A lie told often enough becomes the truth".  Some even go so far as to say Smoot-Hawley caused the Depression.  This can not be because the Depression started in 1929 whereas Smoot-Hawley was passed in 1930 as a response to the Depression and did not become effective until 1931. Here in reverse order of importance are reasons to doubt Smoot-Hawley had that much impact:

 

7)  Not much was heard about Smoot-Hawley being a cause of the Great Depression until free traders were presented with a public relations problem: large numbers of American losing good manufacturing jobs.  Free traders needed a reason to support their free trade no matter what the impact.   To a generation that lived through the Great Depression this was a powerful reason to support free trade.

 

6) United States tariffs were high before Smoot-Hawley was passed.

 

5) The Smoot-Hawley tariff came with a $160 million tax cut.

 

4)  Smoot-Hawley tariffs which went into effect in 1931 began to come down with the 1934 passage of the Trade Agreements Act.

 

3) The United States was a tariff protected economy from 1828 until 1947.  Why were tariffs so bad in the 1930s when they had been a source of economic growth at all other times?   During the period of high tariffs the United States economy overtook free trade Great Britain as the world's most advanced economy.

 

2)  Free traders point to a graph showing that in the 1930s as tariffs go up unemployment goes up.   What makes that less than convincing is that if they plotted the same data for the 1920s they would have seen the opposite result. That is as tariffs increased unemployment went down.   Presented with two pieces of data showing opposite results choosing one over the other says more about bias than the underlying process.

 

1) Foreign trade was not that important in the 1920s or 1930s.  This is the most important reason to doubt that Smoot-Hawley had that great a role to play in the Great Depression.  Ask your elders what foreign products they used.  Coffee and tea for sure.   But not much else.   The general rule was we bought only what we could not make ourselves and sold to others only what they could not make themselves.  Smoot-Hawley did not make trade go to zero.  In September, 1938 Neville Chamberlain flew an American built Lockheed model 14 to Munich to meet Adolph Hitler.  Imports were only 6 percent of the GNP before Smoot-Hawley and were 2 percent after. The Great Depression resulted in a 31 percent drop in GNP and 25 percent unemployment.  Far too much to have been caused by a 4% drop in trade.

 

 

The great wealth creation of the United States did not happen until we became a tariff protected economy in 1828 and lasted until we became a trade dependent economy in 1973.  Since 1973 there has not been a single decade in which the Average Weekly Earnings of Americans rose.  Before 1973, as far back as we have data, there was not a single decade in which real wages did not rise.  Real wages increased during the 1930s in spite of the Depression.  That is the impact of free trade.  The declines all happened during free trade, the increases all happened with trade protections.  Between 1828 and 1947 our tariffs seldom went below 30% and were as high as 62%.  Behind that wall of protection America, and Americans, prospered.  Tariffs will work again.

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#4) On January 29, 2009 at 12:13 PM, TMFLomax (47.20) wrote:

Thanks for posting this. I was also astonished when I heard about the Buy American rider.

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#5) On January 29, 2009 at 12:16 PM, kdakota630 (29.45) wrote:

Lenin's famous quote "A lie told often enough becomes the truth".

I always thought that quote was attributable to Adolf Hitler.

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#6) On January 29, 2009 at 1:55 PM, Tastylunch (29.18) wrote:

I always thought it was properly said "Buy 'Merican!"

I will say this, it makes me mad that other countries do this sort of thing and we don't enforce free trade rules on them. While I don't want another mutually destructive trade war allowing other countries to break/bend WTO rules as they please while we worry about following every last one is ridiculous.That's how you get gigantic trade deficits.

I'm all for Free trade as long as our partners hold their end of the bargain.

This buy American rider doesn't bother me much although I agree it's probably not productive.

Ideally we should have a "help America sell" rider (maybe a huge tax break to manufacturing eh?), that I think would be the better way to go about it instead of creating a false temporary demand that will piss off the Chinese :-)

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#7) On January 29, 2009 at 2:02 PM, socialconscious wrote:

N65321 leave liberal arts folks alone some of the most brillant minds on Earth are/were well-rounded. I would be the glowing  exception as I have both a science and psuedo-psychology(management) degree wirth a gazilllion liberal arts of the non-basket weaving variety.

That being said your point is well taken as  Smoot-Hawley raised average tariff rates by about 2 ½ percentage points from the already high rates prevailing under the Fordney-McCumber Tariff of 1922.and as you said... "Free traders point to a graph showing that in the 1930s as tariffs go up unemployment goes up.   What makes that less than convincing is that if they plotted the same data for the 1920s they would have seen the opposite result" Article below for your perusal.

I cannot determine if we if we concur but I am of the opinion that history is largely repeating itself. Great Gatsby! Speculators are finding externals forces to blame for something that was basically caused by extereme speculations. Simply someone bet or was duped into a sense they could afford an expensive home and to compound Wall street bet on it.

Of note and in fairness on a micro level in the Great Depression and the upcoming enviroment there will be reprisals for any protectionist activity.We are coming form a freer trade base this time around also. Of overwhelming actuality on a macro level is the fact,to paraphrase one fool,we do not make anything anymore. What are we going to do make an already large trade gap 2% wider?

 http://eh.net/encyclopedia/article/obrien.hawley-smoot.tariff

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#8) On January 29, 2009 at 2:04 PM, socialconscious wrote:

dang typos

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#9) On January 29, 2009 at 2:18 PM, socialconscious wrote:

What affect can it have! Do you honesly think that GE, US Steel(X), and Caterpillar are not going to get rid of/use their existing inventory likely manufactured in Mexico, Croatia or China respectively? These are the likely winners infrastructure winners from a logistics and relative size perspective. MY humble-where the dang spell check opinion.

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#10) On January 29, 2009 at 2:48 PM, ByrneShill (75.13) wrote:

If the US wants to raise tariffs on steel and other imported goods, you can kiss the nafta goodbye. Let's see how fast CAT can open plants in canada and mexico. Those 2 econnomies, while not doing great, aren't as badly wounded as the US's. People here are still buying stuff.

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#11) On July 22, 2009 at 11:51 AM, scubafox (< 20) wrote:

This article states: "Smoot-Hawley Tariff Act, which raised the tariffs on 20,000 types of imported goods to a record level and created a global air of protectionism and retaliation from foreign countries that prolonged the Great Depression, it is clearly a big step in the wrong direction."

This is delusional beyond belief. A "Total Trade" downturn is about as likely to have tripped up the economy and caused a Great Depression as a human being would be likely to be tripped by an ant.  Google "Smoot-Hawley Fiction" to see the data. I can't understand why people have been taken in by such blatant propaganda.

For those who think Buy American might provoke a trade war think about the result of losing one: an enormous trade deficit. Gee, that's what we've got. I submit that, with a $708B trade deficit in 2007 ($768B in 2006), we're already in a trade war. And the U.S. has surrendered!

Net Exports reduce GDP when negative. Thanks to what's called "free trade", the U.S. has experienced nearly 3 decades of major anti-stimulus "trade" deficits. From 1980 through 2008, the cumulative "trade deficit", the "trade debt", has totaled over $7 trillion, with $5.1 trillion of that from 2000 through 2008. Can it be any surprise the U.S. economy is collapsing?

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#12) On February 24, 2010 at 4:36 PM, profj (< 20) wrote:

Economists have trouble enough saying what the weighted average effective ad valorem rate of Smoot-Hawley was. I've seen figures from 40% to 60%. (You can keep the nonsense about percentages of GNP/GDP.)

But, assuming that S-H did have a negative impact in its one effective year, that merely tells us that optimal tariff rates should be somewhere between the extremes of 2% and 60%. With that in mind, I'd like to see a massive increase to less than half of the (20%-40%) "normal", non-punitive tariff rates of our "trading partners" -- 9%... and likewise, a cut in local+state+federal income extortion to 9% + or - 1%.

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