Last week, Obama elected to significantly raise tariffs on Chinese-made tires for a period of 3 years, invoking trade law China agreed to when it joined the World Trade Organization in 2001. According to an article published in “The Wall Street Journal”, the move essentially cuts off the source of nearly 17% of the tires sold in the United States. Obama gave no reason for the move other than a jump in Chinese imports.
The Chinese Government responded quickly to the Obama Administration moves announcing the start of anti-dumping procedures against US exporters of chicken and auto products into China. Citing complaints received from local producers who alleged the US products were being dumped in China at below market prices.
Of course, both governments made statements denying the moves were protectionist. But that’s not the only issue relating to trade; France is also beating the protectionist drum.
This from “The Journal”
The smell of trade war is suddenly in the air. Mr. Obama slapped a 35% tariff on Chinese tires Friday night, and China responded on the weekend by threatening to retaliate against U.S. chickens and auto parts. That followed French President Nicolas Sarkozy’s demand on Thursday that Europe impose a carbon tariff on imports from countries that don’t follow its cap-and-trade diktats. “We need to impose a carbon tax at [Europe's] border. I will lead that battle,” he said.
Mr. Sarkozy was following U.S. Energy Secretary Steven Chu, who has endorsed a carbon tax on imports, and the U.S. House of Representatives, which passed a carbon tariff as part of its cap-and-tax bill. This in turn followed the “Buy American” provisions of the stimulus, which has incensed much of Canada; Congress’s bill to ban Mexican trucks from U.S. roads in direct violation of Nafta, prompting Mexico to retaliate against U.S. farm and kitchen goods; and the must-make-cars-in-America provisions of the auto bailouts. Meanwhile, U.S. trade pacts with Colombia, Panama and South Korea languish in Congress.
A trade “smack down” like the one potentially beginning occurred about 80 year ago and preceded the Great Depression. Some historical analysts have even gone so far as to blame this action as one of the causes of the Great Depression. The Smoot-Hawley Act limited world trade and caused damage to the world economy. Just in case you’re not familiar with Smoot-Hawley, read this from the US State Department:
The Smoot-Hawley Tariff Act of June 1930 raised U.S. tariffs to historically high levels. The original intention behind the legislation was to increase the protection afforded domestic farmers against foreign agricultural imports. Massive expansion in the agricultural production sector outside of Europe during World War I led, with the post-war recovery of European producers, to massive agricultural overproduction during the 1920s. This in turn led to declining farm prices during the second half of the decade. During the 1928 election campaign, Republican presidential candidate Herbert Hoover pledged to help the beleaguered farmer by, among other things, raising tariff levels on agricultural products. But once the tariff schedule revision process got started, it proved impossible to stop. Calls for increased protection flooded in from industrial sector special interest groups, and soon a bill meant to provide relief for farmers became a means to raise tariffs in all sectors of the economy. When the dust had settled, Congress had agreed to tariff levels that exceeded the already high rates established by the 1922 Fordney-McCumber Act and represented among the most protectionist tariffs in U.S. history.
The Smoot-Hawley Tariff was more a consequence of the onset of the Great Depression than an initial cause. But while the tariff might not have caused the Depression, it certainly did not make it any better. It provoked a storm of foreign retaliatory measures and came to stand as a symbol of the “beggar-thy-neighbor” policies (policies designed to improve one’s own lot at the expense of that of others) of the 1930s. Such policies contributed to a drastic decline in international trade. For example, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934. More generally, Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations.
President Obama had better step carefully here. Today’s labor unions sound a lot like the farmers of 80 years ago and Obama is beholding to labor unions. Hopefully he doesn’t make what will probably be a bad economic situation worse by creating trade wars.
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