Friday, January 30, 2009

Smoot-Hawley II

During the election cycle, Obama gave mixed signals on trade policy. After signaling the terms of NAFTA had to be altered, his representatives contended it was simply “political posturing” according to the Canadian Consul General in his memo to Ottawa. But organized labor wants its payback for its election support. And that means restrictive import policies. Both Senate and House versions of the Stimulus Bill contain a “Buy America” provision for all steel and other products used for infrastructure projects. It hasn’t taken long for the EU to react, as reported in the London Telegraph: The EU trade commissioner vowed to fight back after the bill passed in the House of Representatives late on Wednesday included a ban on most purchases of foreign steel and iron used in infrastructure projects. The Senate's version of the legislation, which will be debated early next week, goes even further, requiring that any projects related to the stimulus use only American-made equipment and goods. The inclusion of protectionist measures has quickly raised hackles in Europe. Catherine Ashton, the EU trade commissioner, said: "We are looking at the situation. The one thing we can be absolutely certain about, is if a bill is passed which prohibits the sale or purchase of European goods on American territory, that is something we will not stand idly by and ignore." It seems our Congress has a short memory. In 2002, Bush imposed tariffs on steel and steel products to fulfill a campaign promise. The EU and several Asian nations challenged them with the W.T.O. In a little over a year, in November 2003, the W.T.O ruled the tariffs were illegal and authorized $2 billion in retaliatory tariffs. Now here is where the EU did its homework. They have learned how to game the US political system. Instead of using a shotgun, they targeted each member of the House Ways and Means Committee. In each committee member’s district, they selected an industry for retaliation to create the maximum angst among a small but influential group. For Jerry Kleczka from Milwaukee it was a tariff in Harleys, for Mark Foley from south Florida it was orange juice, for Wally Herger of northern California, wines. It was a unique approach that brought pressure on Congress and the President to reverse the tariffs and he soon backed down. But tactics aside, trying to solve a banking crisis with protectionist measures is a recipe for disaster. It doesn’t help, it makes it worse. When we faced the problem once before, we tried to solve it with the Smoot-Hawley Tariff Act. Our trading partners of course retaliated. International trade dried up and the unemployment rate jumped from 7.8% to 25%. Writing in The NextRight, Allen Peel describes how this led us into the Depression. Despite these pleas and protests, Hoover signed Smoot-Hawley in to law and the goods imported from Europe alone decreased by half of what they were before the act. Also, there was a backlash where a number of other nations increased their tariffs on American goods. The other tax increase was in 1932 with a Democrat-led Congress and Hoover. This time, it raised the top marginal tax rate was raised from 25 percent on those making $100,000 or more to a top rate of 63 percent on those making $1,000,000 or more (by comparison, the rate on $100,000 to $149,999 was raised to 56 percent). On top of that, the corporate tax rate was increased from 12 to 13.75 percent (an increase of almost 15 percent). The end result was a jump in the unemployment rate from 7.8 percent in 1930 to 25.1 percent in 1933. It would not be until 1943 when the unemployment rate dropped below 10 percent. Smoot-Hawley didn’t work before, it won’t work now.

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