Trade Policy Debate

Brig “Antelope” in Boston Harbor Fitz Henry Lane (American, 1804–1865)

The idea that international trade competition between the U.S and others countries has to have a defined winner and loser is false. The argument for globalization is that competition among global participants is only a factor in determining countries comparative advantage. That is when a country can produce a good or service at a lower opportunity cost than another country. I believe, proponents of isolationism or protectionism regarding international trade aren’t fully differentiating a country’s absolute advantage, when a country can produce more of particularly good or service most efficiently,  with that of its comparative advantage.

For instance, the irrational fears that Japan would surpass the U.S. economically in the 1980s by businessmen and politicians, became evident of a cold-war, militaristic ideology, solely perpetuated by Washington. The economics would suggest that moving industrial jobs overseas allowed labors domestically to develop more progressive service related inputs into the global economy.

To highlight this point further, take the Video-Cassette Recordings “VCR” business. The major companies involved with producing VCR’s were RCA, JVC, APEX, Matsushita Electronic (Panasonic), Sony, and Toshiba. By the early 1980s, the Japanese VCR companies, Matsushita Electronic (Panasonic), JVC, and Sony, had a significant comparative advantage in producing technically superior and user-friendly product compared to other industry competitors. The Japanese VCR’s spurred a mass-market appeal for video recordings and derivatively, more demand for U.S. film production; where the U.S. has maintained control over a competitive advantage dating back to the end of WWII and the fall of the German film industry.

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One example of when trade tariffs had a sharply adverse effect on the economy and global diplomatic relations was the passing of the Smoot Hawley Tariff by President Hoover in 1930.The proponents of the Smoot-Hawley Tariff argued that it would mitigate unemployment and help revive the economy out of the Great Depression. Finding out, of course, it did not but instead exasperated the impacts of a contracting economy.

What Smoot and Hawley failed to realize was countries would retaliate against the U.S. Which meant U.S. exports declined, and at a higher rate than U.S Imports, albeit imports fell sharply as well.

Foreign countries resented the fact that the worlds largest economy, a creditor country, was trying to police the world by encouraging others to repay their own debts and yet we’re stopping them, regarding repaying those debts, by earning the dollars they need to repay their debts.

In a article by the Economist, entitled “The battle of Smoot-Hawley“, it begins by an account by Thomas Lamont, a partner at J.P. Morgan, where he describes his reaction toward the Tariff, “I almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot Tariff,” he recalled. “That Act intensified nationalism all over the world.”

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Moreover, the CATO institute claims that one-thousand economists wrote to President Herbert Hoover asking him to veto or not to sign the Smoot Hawley legislation. They were cast aside despite their pleas for a rational economic prescription for what would happen to the economy if tariffs were imposed. Trade will collapse, trade frictions between counties would increase, countries will respond and retaliate against U.S. exports.

Smoot-Hawley was just the beginning of a protectionist movement that was sweeping through the U.S. Congress during the Great Depression. Trying to protect domestic farmers, who are export-oriented, selling most of their grains overseas rather than face import competition. Once Congress passed its first legislative Tariff on agricultural goods, which didn’t end up helping farmers very much, they continued into industrial products as well. Since then, Presidents have not looked at one particular section of the country regarding their trade interest are but instead trying to ascertain what is the national interest regarding trade. Supporting trade liberalization, helping other nations to lower their trade barriers as we reduce ours, through the general agreement on tariffs and trade.

Digressing further into an explanative argument against a protectionist economic view with a statement. “Once we adopt a policy of placing tariffs and sanctions against our global trade partners, we move in a direction where the only outcome is a waste of our national resources through the centralized direction of our activities.” -Milton Friedman

Furthermore, President Trump’s most recent tariffs on steel and aluminum and the tax reform bill that is estimated to repatriate an estimated sum of 200 billion dollars back to the U.S. align very closely to events in Germany’s, which led to the “iron and rye” tariff of 1879.

Following the 1870-1871 Franco Prussian War, the French had to pay an indemnity of 5 billion francs to cover the costs of the German occupation. This was a significant capital inflow, which equated to a substantial monetary and fiscal stimulus and the consequent increase in aggregate demand which increased output growth and price inflation for the German economy.

Now, where will the U.S. find a similar capital in-flow with the Federal Reserve winding down there balance sheet? Ah, yes, the  H.R.1 Tax Cuts and Jobs Act. 

However, when the indemnity inflows stopped, depressing aggregate demand, the boom turned to bust. With low rates of growth and high exchange rates for the Deutsche Mark led to an increased demand for protection from a coalition of producers of tradable goods, called the Junkers.

“Increased demand for protection was matched by increased supply.” Here I am applying the common distinction between demand and supply forces in the adoption of tariffs, purposed by Dani Rodrik, “Political Economy Of Trade Policy.”

“On the demand side there are private sector interest that ask for tariff protection; on the supply side there is government that decides on the magnitude and coverage of tariff protection.”

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Ever since the establishment of the Second German Reich in 1871 Bismarck, its Chancellor was interested in making the German federal government independent concerning tax revenues. Bismarck was more willing to support tariffs in the second part of the 1870s because the slowdown in growth increased the dependence of the German government on the member states for tax revenues. This matching of demand and supply forces ultimately led to the adoption of the “iron and rye” tariff in 1879. The “iron and rye” tariff was the first in a series of European tariffs against the effects of increasing integration in the international economy. It is an early example of a backlash against globalization.

The consequences against Germany between global participants wasn’t as rapid as those experienced by the U.S. in the 1930s. However, I would argue that the protectionist stance toward economic globalization lead to the conflicts between European countries, most notably France, which ultimately lead to World War I and World War II.

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The Trump administration has already frayed diplomatic communication between the United States and its global allies. Case in point was the most recent three-day meetings of NATO and G7 countries where global leaders tried to convince Trump, unsuccessfully I will add, to stay in the Paris Climate Accord. Also, Trump deleted from his speech Article IV of the NATO agreement where all NATO countries agree to assist one another if attacked. After this erratic behavior, German Chancellor, Angela Merkel, said this at a campaign speech just after the meetings:

“The times when we could completely rely on others are, to an extent, over.”

I do not necessarily blame her for those comments; nonetheless, I’m not so sure I want Germany, given their past transgressions, to be the sole leader of Europe. Nor am I excited for China to be chief policy dictator of Asian affairs. A brave new world I suppose.

 

Source:

Linked above with in-text citation.

-R.W.N II

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