Anti-Trade Agenda a Real Economy Killer
By Elaine Chao | April 10, 2009
The news media devoted considerable attention in the last election to the allegedly false patriotism of American flag lapel pins. Americans would be well-served in 2009 if more press coverage was devoted to exposing the folly, and false patriotism, of trade protectionism.
We have been down this road before. The Tariff Act of 1930, sponsored by Sens. Reed Smoot and Willis C. Hawley, is infamous for deepening and prolonging the Great Depression. When the Smoot-Hawley bill landed on President Herbert Hoover’s desk, more than 1,000 economists urged him to veto it. Tragically, the president ignored their pleas. Other nations retaliated, and America learned a painful lesson.
By 1932, U.S. exports to Europe were just one-third of what they had been in 1929. The precipitous drop claimed many jobs, contributing to the economic misery that saw the U.S. unemployment rate soar to 25.1 percent in 1933 from 7.8 percent in 1930. Americans did not suffer alone. World trade overall fell two-thirds in the first few years of the Depression.
Today it is apparent that some in Washington have forgotten that history or never bothered to learn it. Lawmakers at home, as well as abroad, are embracing protectionism for the 21st Century that threatens to make an already severe economic crisis even worse.
The World Bank recently reported that, since the beginning of the current economic crisis, countries around the world have enacted 47 measures that restrict trade at the expense of other nations. These instigators include the United States and 16 fellow members of the G-20 who signed a pledge just four months ago to eschew protectionist measures.
In Washington, architects of the stimulus bill—officially titled the American Recovery and Investment Act of 2009—blithely ignored the Great Depression’s teaching that trade protectionism is a sure economic loser. Thankfully, the protectionist provisions in the stimulus bill signed by President Barack Obama are not on the disastrous scale of those approved by Hoover. But they are not inconsequential. They sent a damaging message to the rest of the world, prompted warnings from America’s trading partners and further eroded confidence here at home among those who know that retreating from free trade will further imperil America’s economy.
The “Buy America” provision (“Dig a moat around America”) in the stimulus package did more than squander America’s credibility on international trade. It also created bureaucratic hoops that will slow down spending the stimulus funds on projects that are supposed to energize our economy. Indeed, law firms are counseling contractors and subcontractors to carefully vet their supply chain. One advises: “establish auditable record-keeping and compliance measures, particularly with respect to imported products.” The more complicated the contracting process becomes, the less interest small-business owners will have in participating and the more difficult that participation becomes. That will severely dampen the stimulative power of the funds, as small business is the engine that creates two-thirds of net new jobs in this country.
An even more blunderbuss exercise in protectionism was inserted into the 2009 omnibus appropriations bill, signed into law March 11. That protectionist provision, lobbied for by the Teamsters union, targeted Mexican trucks that had been allowed to haul freight as part of an effort to bring the U.S. into conformance with the North American Free Trade Agreement.
Mexico, the United States’ third-biggest trading partner, wasted no time in responding in-kind. Our neighbors to the south promptly announced new tariffs on 90 American products—including fruits and vegetables, processed foods, Christmas trees and an assortment of manufactured goods.
While this salvo is not a huge blow to our entire economy, it will severely affect the targeted sectors and is emblematic of the fact that America’s own protectionist impulses do not occur in a vacuum. Other countries can, and will, retaliate.
In the lead-up to the recent G-20 summit in London, a letter from Obama appeared in 30 newspapers around the world, including the Chicago Tribune. It wisely stated: “As we go forward, we should embrace a collective commitment to encourage open trade and investment, while resisting the protectionism that would deepen this crisis.” The president must square his deeds with his words. If he does not stand up to the protectionist inclinations in his own party, America’s economy will only deteriorate further.