Don't Call It A Comeback: Smoot-Hawley's Here

by Pejman Yousefzadeh on February 12, 2009

I was honored to be invited recently by the New York Times to contribute to a new blog the paper has called Room For Debate. They asked that I contribute a few words on whether the “Buy American” provisions in the stimulus package — and protectionism in general — were good ideas. I was glad for the chance to do so, and dutifully, I scribbled.

I wrote that night is dark, day is light, ice is cold, fire is hot, and protectionism is bad. Very, very bad indeed.

I argued that there can be no dispute but that protectionist measures like the “Buy American” provisions that the Obama Administration and some Congressional Democrats have sought to make part of the stimulus package, are deeply harmful to American economic interests. Protectionism practiced in America closes off business competition and commensurately, the incentives of businesses to make their products and services better. It limits consumer choice by using tariffs to shut off the free flow of goods. Additionally, protectionism at home encourages other countries to retaliate against our own protectionist tactics by imposing tariffs on our products, preventing American companies from expanding their reach and their ability to enter into overseas markets, thus limiting the ability of American companies to prosper, expand their enterprises, and hire more people. Protectionism is a business-killer, a job-killer, and an economy killer. And when protectionism is practiced, it causes trade wars that bring about the killing of businesses, jobs, and economies all over the world. If today’s protectionists here in the United States were genuinely interested in encouraging countries to “Buy American,” they would work to encourage free trade rather than protectionism. That way, they would give incentives to consumers in overseas markets to buy American, rather than preventing American goods from flowing overseas thanks to the trade wars that will begin in response to American protectionism.

I stated that students of history will be aware that it was protectionism, in the form of the infamous Smoot-Hawley tariff, that augmented the destructive power of the Great Depression. As columnist Willem Buiter has written, “Protectionism was one of the factors that turned a US financial crisis into a global depression in the 1930s. Protectionism imposes large-scale structural sectoral dislocation, as exporters are ejected from their foreign markets and domestic producers that depend on cheap imported imports suddenly find themselves to no longer be competitive, on top of the global effective demand failure we are already suffering from.” It is astonishing that protectionists in Congress and in the Obama Administration appear resolved to forget these lessons and are now seeking to implement “Buy American” policies that will only serve to bring about the disastrous policy consequences that followed the implementation of the Smoot-Hawley tariff.

I contended that protectionism here in the United States will serve to endanger our relations with our allies. Given that the Obama Administration came to office promising to improve America’s relations with our allies, it is more than a little strange that the Administration and its allies in Congress now appear to be working to diminish our alliances with our allies through the design and implementation of protectionist measures.

I further postulated that it is not enough, of course, to simply fight rearguard actions against protectionism by resisting the implementation of protectionist measures. An affirmative effort must be made on the part of the Obama Administration and Congress to bring about greater trade liberalization. This includes reviving the moribund Doha Round, ensuring the passage of the U.S.-Colombia Free Trade Agreement (which would give American companies the same degree of liberalized access to Colombian markets that Colombian companies have to markets here in the United States), and pursuing bilateral trade agreements with other countries even as we work for multilateral liberalization. Sadly, it does not appear that the Obama Administration and its Congressional allies have made it much of a priority to revive Doha and to pursue bilateral and multilateral trade agreements. This is, of course, deeply unfortunate given the current state of the economy. As Harvard economist Greg Mankiw pointed out in the Times, turning our national face away from protectionism is crucial to helping the United States recover from its current economic travails.

And I closed by hoping that the Obama Administration will abandon “Buy American” provisions and other protectionist measures and instead, truly encourage the buying of American products by ensuring that free trade principles not only remain intact, but also thrive in the coming years. Only through the pursuit of free trade policies will the Obama Administration ensure the long term success of American products and services, and thus, the prosperity of American companies and the workers they employ. By use of a a famous parody, the great economist Frédéric Bastiat exposed the fundamental flaws and weaknesses of protectionism. We ought not paper over those flaws and obliterate our historical memory. Doing so will only serve to make a bad economic situation much, much worse.

Alas, one of the perils of writing on the internet is that from time to time, one’s pieces are not accepted for submission. Despite the gracious invitation of the Gray Lady, my writing did not make the cut for the Times’s compilation on the issue of trade policy. C’est la vie.

Instead, the Times gave space to Senator Sherrod Brown of Ohio to make the case for protectionism. I understand the replacement — after all, I am a scribbler, while he is a United States Senator.

Unfortunately, the Senator’s piece is replete with flaws and fallacies. He denounces outsourcing while showing himself to be utterly ignorant of the realities concerning the issue and the fact that a simple cost-benefit analysis shows outsourcing to be a beneficial policy for the United States in the long run. And the Senator brings up the bogeyman of “trade deficits,” not knowing — or perhaps, not caring — that concerns about trade policy constitute a waste of time. Senator Brown condemns as an “elite group” people who frankly know more about trade than he does; to be sure, trade policy cognoscenti are an “elite group” but knowledge concerning trade policy is a good thing, not a bad one and one wishes that there was more “elitism” contained in Senator Brown’s ill-informed jeremiad against free trade. And he dismisses free trade refutations with comments like “some Ivy League economists don’t like [protectionism]— something about Smoot-Hawley and the Great Depression.” “Something” about Smoot-Hawley and the Great Depression, eh? Those who do not remember history are doomed to repeat it, but few of the doomed celebrate the repeating of a tragic history as avidly as Sherrod Brown apparently does.

When it comes to editorial space in the New York Times, I understand that the words of a U.S. Senator outweigh my own. My only hope is that Sen. Brown will read the thoughts of others before he translates those editorials into policy on the floor of the United States Senate. For if his trade legislation reads like his editorial does, I fear the consequences for our economy.

Previous post:

Next post: