Trade Protectionism
1929 and 2009

"As the bill moved through Congress, formal protests from foreign countries flooded into Washington, eventually adding up to 200 pages. Both houses voted aye nonetheless. While the legislation sat on the President's desk, 1,028 American economists called for a veto. Herbert Hoover made it the law of the land anyway, swallowing his own reservations and, on June 17, signing the Tariff Act of 1930".-- Time Magazine

You may have heard of Smoot-Hawley and not have a clue what language they are speaking. 

According to Wikipedia, The Smoot-Hawley Tariff Act was an act signed into law on June 17, 1930, that raised U.S. tariffs on over 20,000 imported goods to record levels.

It was such a bad idea that 1,028 economists in the United States actually signed a petition against this protectionist legislation. They knew what the result would be.

 They knew that after it was passed, many countries would retaliate with their own increased tariffs on U.S. goods, and that is exactly what happened.

A bill that was designed to increase American jobs had the exact opposite effect as exports and imports with the  rest of the world plunged by more than half.

Robert Prechter of  Elliottwave International believes the social mood that spawned the Smoot-Hawley Act was actually the catalyst for the 1929 stock market crash.  In his 2002 best-seller Conquer the Crash he said,

Subsequently the severe reduction in U.S.-European trade from its high in 1929 to its depressed levels of 1932 spawned the start of the Great Depression.

Anyone who has taken Economics 101 has heard that restrictions on  free trade always end up making everyone poorer.  This is because it creates inefficiencies in the balance of trade.

Suppose an item that used to cost $1.00 has a $1.00 tariff tacked on to it in order to make the "predatory foreign imports" cost more than the $1.90 American made products.

Yes, it would have helped the American producer and temporarily helped the unemployment rate, at the expense of it's trading partners.  But in so doing it would also hurt the buyer (who presumably is also an American) who now has to pay almost twice as much for the same product (which he wouldn't have done had the government not intervened.)

In addition to this one product what then happens next reminds me of an old Arabian proverb: "If the camel once gets his nose in the tent, his body will soon follow."

In this case what follows is a load of other products get added to the list of "protected items".  In 1928, while running for president Hoover promised to help beleaguered farmers by raising tariffs on agricultural products.

After being elected and talking to economists President Herbert Hoover actually asked Congress for a downward revision in overall tariff rates. But fellow Republicans  Senator Reed Smoot, from Utah, and Representative Willis C. Hawley, from Oregon co-sponsored the Smoot-Hawley Tariff Act which raised rates instead. Although 1,028 economists urged him to veto it, Hoover signed the bill anyway. Partly because of his campaign promise and partly because of social mood.

Although his original intent was to protect the American Farmer according to the U.S. Department of State website,  "Once the tariff schedule revision process got started, it proved impossible to stop. Calls for increased protection flooded in from industrial sector special interest groups and soon a bill meant to provide relief for farmers became a means to raise tariffs in all sectors of the economy."

So even though Hoover knew it probably wasn't a good idea his hand was forced by special interests and the social mood of the day.

What does that have to do with today? 

Ripped from Today's News--

WASHINGTON (AFP) – A new “Buy American” push in President Barack Obama’s economic stimulus plan is sparking protests about protectionism from US businesses and trading partners.

Obama has pushed for swift passage of the American Recovery and Reinvestment Act as vital to prevent the collapse of the fragile US economy as it reels from the global financial crisis.

The US House of Representatives passed an 819 billion dollar economic stimulus package Wednesday with a “Buy American” provision that generally prohibits the purchase of foreign iron and steel for any stimulus-funded infrastructure project.

The massive tax cuts and spending package has moved to the Senate, where lawmakers are working on their own version that extends the “Buy American” initiative beyond the House’s iron and steel mandates to include all US manufactured goods.