Thursday, May 21, 2009

Smoot-Hawley?

Remember that "Buy American" provision in the $787 Billion Stimulus Package?
It inserted "shall be applied in a manner consistent with United States obligations under international agreements," to help appease our trading partners and rightfully so.
The most basic fact about trade is that it's a two way street.
You buy my goods, pay me in your currency and I buy your goods that you pay with my currency. Simple enough even Congress sometimes figures it out.

Apparently though, local municipalities and state governments read "international trade agreements" like Congress reads the Bills it passes.

Ordered by Congress to “buy American” when spending money from the $787 billion stimulus package, the town of Peru, Ind., stunned its Canadian supplier by rejecting sewage pumps made outside of Toronto. After a Navy official spotted Canadian pipe fittings in a construction project at Camp Pendleton, Calif., they were hauled out of the ground and replaced with American versions. In recent weeks, other Canadian manufacturers doing business with U.S. state and local governments say they have been besieged with requests to sign affidavits pledging that they will only supply materials made in the USA.

Outrage spread in Canada, with the Toronto Star last week bemoaning “a plague of protectionist measures in the U.S.” and Canadian companies openly fretting about having to shift jobs to the United States to meet made-in-the-USA requirements. This week, the Canadians fired back. A number of Ontario towns, with a collective population of nearly 500,000, retaliated with measures effectively barring U.S. companies from their municipal contracts — the first shot in a larger campaign that could shut U.S. companies out of billions of dollars worth of Canadian projects.

You know what that means....those Canadian's are not buy our goods. Which means, our goods are not going to get sold, which means a cut in productions which means a cut in employment.
Economists know it, that's why they opposed the "Buy American" provisions in the first place.
Second, the notion that even an effective W.T.O.-consistency qualifier in our procurements will soothe other nations and prevent trade retaliations and trade wars is na├»ve. Contrary to what others believe, countries like Brazil, China and India, which have not signed the W.T.O.’s 1995 agreement on governmental procurement and, therefore, do not enjoy those rights to our procurement purchases, will retaliate. They can raise many current tariffs also in a “W.T.O.-consistent” way. (Remember that China and India have large public sectors.) They can easily shift their purchases of aircraft, nuclear reactors and other high-value goods from us to Europe and Japan. We would then retaliate, prompting retaliations by the others: all in a W.T.O.-consistent fashion. Indeed, President Obama would find himself in a W.T.O.-consistent trade war.
This one from Burton Folsom author of New Deal or Raw Deal?
“Slap a tariff on China and save American jobs,” the protectionists say.

This tempting line of reasoning is flawed for two reasons. First, if Americans pay more for, say, American-made shoes or shirts, then they have less to spend for other things they might need — they are simply subsidizing inefficient local producers. And those American manufacturers, who are protected from foreign competitors, have little incentive to innovate and cut prices.

Second, if we refuse to buy China’s imports, China will refuse to buy our exports, including our first-rate computers and iPods. Our export market collapses. We saw this happen during the The Great Depression when Congress passed, and President Herbert Hoover signed, the Smoot-Hawley Tariff in 1930. That tariff, the highest in United States history, foisted high import duties on more than 3,000 foreign items. The Europeans immediately retaliated, and this deepened the Depression throughout the world. When we refused to buy Swiss watches, for example, the Swiss refused to buy American wheat and Chevrolets.

The collapsing export market after 1930 helped to set off a decline in American industry. United States automakers sold more than five million cars and trucks in 1929, but only about 1.8 million in 1933. Other causes (including tax increases under both Hoover and Franklin D. Roosevelt) also made the Great Depression worse, but the Smoot-Hawley Tariff was a significant reason the Depression was as severe as it was — 25 percent unemployment at its worst.

Free trade benefits buyers and sellers. Tariffs benefit certain sellers at the expense of all buyers.
Unfortunately, those who don't learn from history are doomed....well you know the rest.

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