The Tempting Path of Protectionism

The Obama administration is playing with fire when it tries to bully other countries like Mexico and China to satisfy protectionist interest groups in the United States, says Jim Powell, a senior fellow with the Cato Institute.

It might be worth recalling how the Tariff Act of 1930 – still the statutory basis of U.S. trade policy – increased costs for consumers and businesses, devastated trade and plunged the Western world deeper into the depression that was already under way.

On June 17, 1930, President Hoover signed what became known as the Smoot-Hawley Act.

The law raised import duties an average of 59 per cent on more than 25,000 agricultural commodities and manufactured goods.

More than 60 countries retaliated with restrictions against whichever products would inflict the worst losses on Americans.

In Great Britain, Smoot-Hawley helped provoke a protectionist reaction that led to the Import Duties Act (1932), the country's first general tariff law in more than a century.

Part II of the Import Duties Act provided 100 per cent tariffs on goods from countries such as the United States that penalised British goods.

Because Smoot-Hawley included cork, which accounted for more than half of Spain's exports to the United States, Spain increased tariffs on American cars by 150 per cent, enough to shut American cars out of the Spanish market.

Smoot-Hawley hit Italy's principal exports to the United States, including raw cotton, wheat, copper and leather, and Italy retaliated by more than doubling its tariffs on American cars; sales of American cars in Italy subsequently dropped 90 per cent.

American farmers, who had lobbied hard for Smoot-Hawley, were among the biggest losers from all this. They saw their exports plunge from $1.8 billion in 1929 before Smoot Hawley to $590 million just four years later.

Rather than risk setting off another protectionist binge, the United States should pursue genuine hope and change: Begin the process of phasing out Smoot-Hawley and all its costly amendments.

Source: Jim Powell, The Tempting Path of Protectionism, Washington Times, October 22, 2010.

For text: http://www.washingtontimes.com/news/2010/oct/22/the-tempting-path-of-protectionism/

For more on Trade Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=42

First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 02 November 2010