Weekend Feb 24, 20118
The Real Worry is not the Wall or Russia
Republican senators were quick to respond. They disagreed with the idea of a retaliatory tariff war. As Roy blunt R-Mo. Put it, “I think we need to be more positive about our trade opportunities.”
Lawmakers also stressed caution regarding Trump’s dissatisfaction with NAFTA. This has also been the case with multiple Chambers of Commerce, Governors, and both Mexico and Canada. Senator John Thune R-S. D. remarked that “withdrawing form NAFTA would be a disaster.
This column Weekend of January 26, 2018
That weekend I warned that President Trump was dangerously close to repeating the folly of the 1930 Tariff Act otherwise known as the Smoot Hawley Tariff Act. It cut trade by 25% thereby prolonging the Depression. And the damage would not cease until the General Agreement on Trade and Tariffs began in 1944, taking full effect by 1948.
This past week brought more early warnings of Trump’s simplistic ‘us versus them’ view of trade.
Last year the President set this potential disaster in motion by instructing the Commerce Department to investigate if steel and aluminum imports threaten national security under Section 232 of the Trade expansion Act of 1962. As instructed, Commerce concluded they do.
This is in spite of the 164 anti-dumping duties on steel already in effect. There re two dozen tariffs on Chinese steel and more on aluminum. Canada accounts for 43% of our aluminum imports, but more on that later.
The tax reform act is brining money back to the US. But more tariffs will only increase the cost of doing business in all industries using steel and aluminum. Indeed more workers lost jobs (200,000 due to Bush’s 2002 steel tariff than were employed by the entire steel industry (187,500).
As we warned January 26, this ‘strategy’ plays right into the hands of China’s goal of becoming the new manufacturing super power in the world. Withdrawing from the Trans Pacific Trade Partnership puts China in that driver’s seat, free to make global arrangements. The Trump idea of a separate trade deal for each nation is foolish when so many products, like autos, are built from material imported from multiple nations.
One hopeful example is the creation of a pro-Nafta website by Mexico , no less. check out www.naftamexico.net. This English website allows one to click on each of our 50 states to see the NAFTA advantage. Columns and letters continue to sprout advocating the benefits of NAFTA. But I was discouraged again reading the latest in the US Canada trade talks.
The US runs a $12.5 billion dollar trade surplus with Canada. Apparently Canadian Prime Minister Justin Trudeau does not care for the politically incorrect President Trump. Nor does the Canadian Parliament. As a result Canada has done little to sell the trade deal Canada. We have not seen full page ads bulwarked by newspaper editorials demanding continuation of the 20 year NAFTA trade boom. Canada has been America’s closest ally and trading partner, well ever since there has been an America and Canada.
Meanwhile Trudeau has inked deals with the European Union and the Trans Pacific Partnership. Is this a literal snub, aiming to reach the same conclusion as Trump, better no deal than any perception of a flawed deal?
This week America is back to arguing gun safety when in fact the issue is school safety. There are no school shootings in Israel where all schools have armed guards. Install the same safeguards for schools that exist in every Federal Courthouse. Buildingaccess should be limited to entrances with metal detectors manned by armed police. Require students and teachers to have ID badges just as corporations do at their locations. Problem solved. Then get serious about avoiding another Smoot Hawley fiasco.
The US Dollar has been weak against the Euro. But that relationship is about to change. The Euro is stretched to its upper limit and the buck appears to be finding support at the 88-89 level. Crude oil has surged back to the $62-63 level. But that is below the previous high of $66-67. Resurgence in the dollar is liable to weaken oil prices.
The stock market remains the same. The previous high of DJIA 26,600 still stands. Unless the February 16high of 25,432 is taken out, the more likely direction for stocks is down. Leadership is ever more narrow with just three stocks moving the NASD.
“That weekend I warned that President Trump was dangerously close to repeating the folly of the 1930 Tariff Act otherwise known as the Smoot Hawley Tariff Act”
From 1930-1932 as tariffs (Smoot-Hawley) went up the economy went down. The problem with blaming Smoot-Hawley is that in all other tariff increases the economy went up. For example, after World War I the nation went into a deep depression. Congress responded with the Fordney–McCumber Tariff of 1922. The resulting economic boom is generally referred to as the Roaring Twenties.
Tariffs also have failed to improve the economy. Grover Cleveland’s Wilson-Gorman Tariff of 1894 reduced tariffs slightly but did not fix the Panic of 1893 costing Cleveland reelection.
From the Tariff of 1816 until the Kennedy Round of Tariff Reductions in 1967 the United States was the most tariff protected nation on earth. From the Morrill Tariff of 1861 until 1900 tariffs averaged 45 percent. Behind that wall of protective tariffs good things happened including eclipsing free trade advocate Great Britain. The Boogie Man didn’t get us.
With respect to the Smoot-Hawley tariff bear in mind that two things happening at the same time does not mean one causes the other. As my statistics professor put it correlation does not equal causation. International trade peaked in June 1929 and started going down. A year later Smoot-Hayley became law in June 1930. By then much of the trade decline had already happened. However, Smoot-Hawley did not become effective until a year later in June 1931. Smoot-Hawley can only be blamed for the trade decline that happened after June 1931.
The irony is that the whole purpose of Smoot-Hawley was to drive down trade. That is why it was passed. Given the history of the previous 100 years the Congress, Senate, and the President had every reason to believe it would improve the economy. I suggest you have no hard data other than that the tariff increase and the Depression happened at the same time to prove they were wrong.
Free trade is an Ivory Tower Theory that has never worked in the real world to produce prosperity for citizens but rather concentrates wealth in the few. After suffering a hundred years from free trade the British voted for socialism. The Chinese who had free trade forced on them by Great Britain after the Opium Wars went whole hog with communism.
Posted by: James Murphy | February 25, 2018 at 03:06 PM