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Friday, February 6, 2009

Smoot and Hawley Return

Sheldon Richman is the editor of The Freeman and “In brief,” and author of  “Fascism” in The Concise Encyclopedia of Economics. TGIF appears Fridays.

As if the “economic stimulus” bill was not bad enough, it also contains a “Buy American” provision. It is now truly an economic sabotage bill. This is particularly scary. When the economy soured last year, one could reassure oneself that this would not be a repeat of the 1930s because 1) a dramatic contraction of the money supply was unlikely (the Fed presumably having learned the lesson of the Great Depression) and 2) we would never see the likes of Smoot-Hawley again. This, of course, refers to the monstrous tariff bill that Congress passed and President Herbert Hoover signed in 1930 in the name of protecting American jobs. In the international protectionist orgy that followed, world trade collapsed and helped make the Great Depression something that will be studied forever more.

Now maybe we shouldn’t be so sure. The monetary contraction still seems unlikely, but Messrs. Smoot and Hawley have apparently returned from the netherworld along with Keynes. These are three guys I had hoped were gone for good. (By the way, Paul Krugman favors the protectionism: “[T]hese are not normal conditions…. [P]rotectionism can make the world as a whole better off.” Yikes!)

The House version of the sabotage bill mandates that all infrastructure projects use American iron and steel. The Senate’s first version had even more inclusive language. It required that all “manufactured goods” bought under the program be American-made. (Some exceptional circumstances are allowed.)

While this aspect of the bill hasn’t gotten the big headlines that others have, it has created a firestorm among America’s trading partners. Europe, Canada, and Australia voiced concern, enough to make President Obama appear to back away. “We can’t send a protectionist message,” he said. This couldn’t have pleased his party members in Congress who got into power on the wings of populist, protectionist rhetoric.

Now it looks as though the White House and Senate have reached a compromise in the usual Washington manner. They fudged the issue. The Washington Post reported, “[T]he Senate voted unanimously … by voice vote to tone down a controversial ‘Buy American’ provision that had sparked an uproar among foreign leaders who warned that it could lead to a trade war. The new language would add the caveat ‘applied in a manner consistent with U.S. obligations under international agreements’ to a requirement that public works projects funded by stimulus money use only American-made materials.”

Does this really take protectionism out of the bill? Who knows? The U.S. government is a party to several trade agreements with which the “Buy American” provision would seem to be in conflict. On the other hand, why have the provision at all if it may not be carried out in violation of trade agreements? In Washington there is always wiggle room, and this is especially true with so-called trade agreements. As the New York Times points out, “Buy America” is hardly a new idea — Congress has passed similar requirements for seven decades — and in many cases it is not considered a violation of trade treaties.”

If that’s the case, then the language added by the Senate is a ruse. The bill remains protectionist, and even if there were no other reason, that would be grounds to hope for its defeat.

Protectionist Fallacies

Of course the industries and unions that want the provision say it will create more American jobs than if foreign-made products are purchased. But it’s a mistake to think that protectionism creates or protects jobs overall. While it may protect certain jobs, it does so at the expense of others.

This is a classic case of the “broken window fallacy,” or ignoring the “unseen” secondary effects of government policy. When Americans buy imports, foreign sellers obtain dollars with which they can buy American-made products or invest here. Either way, Americans and foreigners benefit through trade.

When laws prohibit or limit the purchase imports, foreigners have fewer dollars and therefore fewer opportunities to buy American exports or to invest. The Americans who would have benefitted from those transactions lose out. So while protectionism is defended as a way to help the American economy (at the expense of foreigners), in fact it is special-interest legislation that helps only a small well-defined interest group at the expense of many other Americans. If people generally understood this, they would not fall for protectionist appeals.

The damage to Americans will be even worse if the “Buy American” provision sets off a trade war. The effected countries have already said they will complain to the World Trade Organization. If the WTO finds the provision a violation and if it is not rescinded, this will give other countries the legal cover to retaliate against American products.

The last thing we need now is a trade war, a contraction in world trade, and an inflammation of national rivalries. Congress is playing with fire. Every one of them should Google “Smoot Hawley” and read for a while.

None of what I’ve said should be taken as approval of trade agreements or the economic sabotage bill. We should practice free trade unconditionally, and government spending should be radically cut, not increased. Nevertheless, adding protectionism to the bill is a pretty stupid thing to do.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.