Source: Continuous Improvement Associates

Social Issues
Smoot-Hawley Hogwash
By Bob Powell, 9/29/10

Published in the Colorado Springs Gazette as We’ve already surrendered, 10/4/10

Regarding Robert Samuelson's column, Sept 28, "The makings of a trade war with China are all in place".

It's incredible that anyone would continue to think the Smoot-Hawley tariff "contributed to the severity" of the Great Depression. Doing so requires ignoring that "Total Trade" (imports + exports) was between 0.4 and 0.8 percent of GDP from 1929 through 1941. And the trade balance over the 30s was relatively stable, about $50M +/-$50M.

Such a minuscule "Total Trade" downturn is about as likely to have tripped up the economy and contributed to the Great Depression as a human being would be likely to be tripped by an ant. The very idea is absurd.

Samuelson's hand wringing that we could face the "prospect of a trade war with China" shows he's totally disconnected from reality. From 2000 through July 2010, the cumulative trade deficit (the trade debt) has been $5.9 trillion, which directly subtracted from GDP. No wonder this, and related job offshoring, has our economy in collapse.

What this means is the U.S. is already in a trade war and we've lost. But we haven't been defeated; we've unilaterally surrendered. "Free trade" proponents did not simply lead the surrender, they collaborated with the enemy.

That Samuelson doesn't know this is what's truly dangerous.

Bob Powell, Colorado Springs

Note to the Editors: For detailed data proving my points, see
Smoot-Hawley Fiction, 2/15/09. Smoot-Hawley tariff "protectionism" is continually being blamed for the Great Depression: "OMG, that would start a trade war and hurt our exports. After all, doncha know that caused the Great Depression?!!!" Trouble is, our enormous trade deficit shows we've been in, and lost, that war. Creating balanced trade and Buy American are perfectly consistent with fundamental economic development principles and are not "protectionism." "Free trade" proponents commit economic treason by perpetrating pro-"free trade" propaganda. Not to put too fine a point on it, they're lying. Here's why it's obvious. And it wasn't FDR's New Deal that prolonged it either.

Samuelson's Column, to which I respond:

The makings of a trade war with China By Robert J. Samuelson
Monday, September 27, 2010

No one familiar with the Smoot-Hawley tariff of 1930 should relish the prospect of a trade war with China -- but that seems to be where we're headed and probably should be where we are headed. Although the Smoot-Hawley tariff did not cause the Great Depression, it contributed to its severity by provoking widespread retaliation. Confronting China's export subsidies risks a similar tit-for-tat cycle at a time when the global economic recovery is weak. This is a risk, unfortunately, we need to take.

In a decade, China has gone from a huge, poor nation to an economic colossus. Although its per capita income ($6,600 in 2009) is only one-seventh that of the United States ($46,400), the sheer size of its economy gives it a growing global influence. China passed Japan this year as the second-largest national economy. In 2009, it displaced Germany as the biggest exporter and also became the world's largest energy user.

The trouble is that China has never genuinely accepted the basic rules governing the world economy. China follows those rules when they suit its interests and rejects, modifies or ignores them when they don't. Every nation, including the United States, would like to do the same, and most have tried. What's different is that most other countries support the legitimacy of the rules -- often requiring the sacrifice of immediate economic self-interest -- and none is as big as China. Their departures from norms don't threaten the entire system.

China's worst abuse involves its undervalued currency and its promotion of export-led economic growth. The United States isn't the only victim. China's underpricing of exports and overpricing of imports hurt most trading nations, from Brazil to India. From 2006 to 2010, China's share of world exports jumped from 7 to 10 percent.

One remedy would be for China to revalue its currency, reducing the competitiveness of its exports. American presidents have urged this for years. The Chinese acknowledge that they need stronger domestic spending but seem willing to let the renminbi (RMB) appreciate only if it doesn't really hurt their exports. Thus, the appreciation of about 20 percent permitted from mid-2005 to mid-2008 was largely offset by higher productivity (a.k.a. more efficiency) that lowered costs. China halted even this when the global economy crashed and has only recently permitted the currency to rise. In practice, however, the renminbi has barely budged.

How much China's currency is undervalued and how many U.S. jobs have been lost are unclear. The Peterson Institute for International Economics, a research group, says a revaluation of 20 percent would create 300,000 to 700,000 U.S. jobs over two to three years. Economist Robert Scott of the liberal Economic Policy Institute estimates that trade with China has cost 3.5 million jobs. This may be high, because it assumes that imports from China displace U.S. production when many may displace imports from other countries. But all estimates are large, though well short of the recession's total employment decline of 8.4 million.

If China won't revalue, the alternative is retaliation. This might start a trade war, because China might respond in kind, perhaps buying fewer Boeings and more Airbuses and substituting Brazilian soybeans for American. One proposal by Reps. Tim Ryan (D-Ohio) and Tim Murphy (R-Pa.) would classify currency manipulation -- which China clearly practices -- as an export subsidy eligible for "countervailing duties" (tariffs offsetting the subsidy). This makes economic sense but might be ruled illegal by the World Trade Organization. A House committee approved this approach last week; the full House could pass it this week. Ideally, congressional action would persuade China to negotiate a significant currency revaluation.

Less ideal and more realistic would be a replay of Smoot-Hawley, just when the wobbly world economy doesn't need a fight between its two largest members. Economic nationalism, once unleashed here and there, might prove hard to control. But there's a big difference between then and now. Smoot-Hawley was blatantly protectionist. Dozens of tariffs increased; many countries retaliated. By contrast, American action today would aim at curbing Chinese protectionism.

The post-World War II trading system was built on the principle of mutual advantage, and that principle -- though often compromised -- has endured. China wants a trading system subordinated to its needs: ample export markets to support the jobs necessary to keep the Communist Party in power; captive sources for oil, foodstuffs and other essential raw materials; and technological superiority. Other countries win or lose depending on how well they serve China's interests.

The collision is between two concepts of the world order. As the old order's main architect and guardian, the United States faces a dreadful choice: resist Chinese ambitions and risk a trade war in which everyone loses; or do nothing and let China remake the trading system. The first would be dangerous; the second, potentially disastrous.

© 2003 Continuous Improvement Associates

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