DC Velocity - April 2009

bigpicture

Peter Bradley Editorial Director peter@dcvelocity.com

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Columnists:

Clifford F. Lynch Don Jacobson Shelly Safian Kenneth B. Ackerman Art Van Bodegraven Barry Brandman

the ghosts of Smoot and Hawley

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Mitch Mac Donald Group Editorial Director mitch@dcvelocity.com

Jim Indelicato
Group Publisher
jindelicato@dcvelocity.com

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BACK IN 1930, WITH THE UNITED STATES FACING A DEEP RECESsion, Congress and the Hoover administration took what supporters argued was a major step to protect the U.S. economy. The Smoot-Hawley Act, signed in June of that year by President Hoover, increased more than 900 import duties. That act of protectionism led to precisely the consequences opponents had predicted: retaliation by many other nations. With trade already drying up, those new impediments to international commerce almost certainly hastened the slide into a full-scale depression. “The act added poison to the emptying well of global trade,” The Economist said in a December article on the history of the Smoot-Hawley Act and renewed calls for protectionist laws in the current global recession.

One such effort—the demand for “buy American” rules in the economic stimulus package enacted in February—met with some success. The law requires, with some important exceptions, that infrastructure projects funded through the law use steel and other products manufactured in the

United States. After an outcry by economists and major trading partners, the Obama administration persuaded Congress to water the provision down in the final bill. But proponents of freer trade still fear that it could open the door to other protectionist measures— measures they believe could seriously impede a recovery from this deep and ugly recession.

Of course, supporters of protectionist rules have their own arguments as well: that we need to do everything we can to promote manufacturing in the United

States, and that other nations have protectionist rules of their own. Many proponents of revisiting trade pacts argue that we have gone too far in the past, rewarding nations with shoddy labor and environmental practices that keep costs low and allow unfair competition with domestic firms. Those arguments have validity.

But I worry that any rules that serve to restrict trade in an economic environment that has become so interdependent cannot help a recovery and have great potential to slow it.

Now, no one is calling for anything as extreme as the Smoot-Hawley Act. And no one is suggesting that the law deserves all or even most of the blame for the Depression. The new impediments to trade certainly contributed to it, but many other forces were at work, just as they are today.

The world is a lot different than it was in 1930. International trade has soared, and nations are aware of how interconnected economies have become. Existing trade agreements would be difficult to dismantle. But fear is a powerful thing, and those who live in fear are more likely to build walls than bridges. The ghosts of Smoot and Hawley may haunt us yet.