Friday, June 26, 2009

Smooting export markets in China

One of my favorite books is Dave Barry Slept Here, Barry's late-1980s version of a U.S. history text. By the time Barry had reached the Great Depression, he derived great joy from constant repetition of references to the Smoot-Hawley Tariff Act, the 1930 Act that is often cited by free-traders and Hoover-haters alike as an example of all that is wrong with the world. In reality, Smoot-Hawley (formally the Tariff Act of 1930) was not exactly what President Hoover ordered. Wikipedia:

When campaigning for president during 1928, one of Herbert Hoover's many campaign promises to help beleaguered farmers had been to increase tariffs of agricultural products. Hoover won, and Republicans obtained comfortable majorities in the House and the Senate during 1928. Hoover then asked Congress for an increase of tariff rates for agricultural goods and a decrease of rates for industrial goods.

The House passed a version of the act in May 1929, increasing tariffs on agricultural and industrial goods alike.

Economists spoke with one hand on this one, warning that an increase in U.S. tariffs would harm the country. They were joined in their opposition by key industrialists such as Henry Ford, to no avail. Hoover personally opposed the bill, but was convinced to sign it.

Afterward, it appeared that the economists were right, since exports from the United States to Europe declined sharply, but there is not universal agreement regarding whether Smoot-Hawley was the primarily cause of this decline, or just the inability of Depression-ravaged Europe to afford American products regardless of the tariff rate. The eventual response to Smoot-Hawley was Bretton Woods and GATT, designed to lessen tariffs between nations.

Smoot-Hawley still appears in political discourse, although sometimes the facts are somewhat confused, as when a Republican House member blamed FDR for the "Hoot-Smalley Act." (Presumably she exercised her power"revise" her remarks in the Congressional Record.)

John Foley and Jeff Segal touched upon the act in an article on China in the New York Times:

A request from Beijing that local governments “Buy China” is worrying — and hypocritical. Even as President Hu Jintao joined leaders of Brazil, Russia and India at a summit meeting in Yekaterinburg, Russia, in calling for an end to protectionism, a diktat from several Chinese ministries suggested that government projects should favor domestic suppliers in spending some $586 billion of fiscal stimulus money. Such doublespeak is dangerous. Countries with bloated export sectors shouldn’t throw stones....

Recall the Smoot-Hawley Act of 1930, in which the United States raised tariffs against imports to protect domestic industries and shore up employment. At first it worked. But when other countries retaliated, unemployment in the nation more than doubled. China might face a similar problem. And with civil unrest Beijing’s greatest worry, such a price looks too high.
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