Beggar Thy Neighbor Rhetoric Leads to Protectionism
Posted by Michael A. Kamperman on May 4, 2009
Many economists attribute a worsening of the economic downturn in the 1930’s to “beggar thy neighbor” protectionists policies that stymied world trade. As economies contract and the political pressure increases on national politicians all over the world it is to be expected that efforts to keep jobs at home will hold sway. Today President Obama sought to increase taxes from foreign operations of U.S. corporations under the guise of protecting U.S. jobs. It won’t be long before such rhetoric requires even more action. “It’s a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y.,” President Obama said today. The message out of Washington is increasingly “buy American” and “keep the jobs at home.” Other countries such as Japan are paying for immigrant workers to be shipped back home. As the economic downturn worsens historical lessons will not stop world leaders from protecting the home turf first.
The U.S. suffered the most from protectionist impulses in the 1930’s. The U.S. was a creditor nation and ran large trade surpluses in the 1920’s that carried over into the 1930’s. However, today the U.S. is a debtor nation and runs far and away the largest trade deficits in the world. This means that if global trade contracts due to protectionism, the U.S. will not suffer nearly as much as those countries running large trade surpluses. Enhanced global trade makes the global economic pie bigger. But, if a country runs protectionist policies that country may stand to benefit at the expense of other countries. However, if all countries run protectionist policies it becomes worse for everyone. As economies continue to suffer it is almost impossible for politicians to resist protectionist policies that create and protect more jobs at home rather than abroad. Like the U.S. in the 1930’s, the countries that stand to suffer the most are those that run the largest trade deficits.
Today no country has larger trade surpluses than China. It only stands to reason that if global trade contracts China will be impacted the most. Ironically many countries are looking to China to spur global economic growth at the same time they are giving in to protectionist policies at home. The protectionist genie is already out of the bottle. If the U.S. government doesn’t quickly get in front of the curve a 1930’s rise in protectionism shrinking the world economic pie seems inevitable.
Badtux said,
There is one strain of modern thought which says that the Smoot-Hawley Tariff Act of 1930 did not worsen the Depression in the United States by any significant degree. It had disasterous effects in Germany, which was frantically exporting in an attempt to pay off its WWI reparations debts, but the bigger culprit in worsening the Depression in the U.S. itself was when the banks started collapsing and threw the money supply into a deflationary spiral. When deflation sets in, money tends to migrate to becoming “mattress money” and no longer contributes towards lubricating economic activity. Some of my elderly relatives vividly remembered having to basically resort to a barter economy for most of their needs during the depths of the Depression because there literally was no money to be found anywhere around — it had largely all disappeared under mattresses, either real or virtual (such as bank vaults of banks which were not lending because if you can’t get interest because deflation is at 20% per year, what’s the point?).
In short, protectionism isn’t helpful right now, but I don’t see it as being as harmful as you apparently do. In particular, for your example of China, much of China is still horribly poor and lacking in all material comforts. If a collapse of export markets causes China to re-direct some of its massive exports back inwards towards improving the quality of life of its own people rather than amassing hoards of foreign exchange, protectionism may actually *help* China by improving its overall quality of life. The U.S. today is far more likely to have ill effects from protectionism than China… the U.S., after all, cannot even make its own *underwear* anymore. No imports means we all go commando under our togas (because we can’t make shirts and pants anymore either). The U.S. has become addicted to cheap cr*p from China, and withdrawal from that addiction in the event of a protectionist outbreak will be much more painful for the U.S. than it would be for CHina (assuming that the gerontocracy in China remembers in time that they are totalitarian dictators with a command economy that has a capitalist substrate on top of it, and re-direct their massive industrial output inwards to preserve jobs and social order).
Badtux said,
More numbers: Imports during 1929 were only 4.2% of the United States’ GNP and exports were only 5.0% of the U.S. GDP. So if all imports and exports were shut down by Smoot-Hawley, that accounts for only 0.8% of US GDP — not helpful, but certainly not accounting for the 20%+ drop in GDP that happened shortly thereafter.
Peter, OH said,
All such anti-Protectionism talks sound reasonable, however, IF Americans do not buy cars made in USA, how our economy recover, and IF companies keep moving jobs out of USA, how ordinary Americans make living?
No one is willing to give an answer on such Q.
Badtux said,
Peter, I think the reason nobody will give you a simple answer is that there is not a simple answer. An outbreak of outright protectionism given the current state of the U.S. economy would harm the U.S. much more than it harmed U.S. trading partners, most of who have the capability to redirect output currently directed at the U.S. into their own internal markets. On the other hand, you are correct that, in the long term, weaning the U.S. economy out of its utter dependency upon foreign manufacturing and foreign capital is necessary to avoid the fate of the Ottoman Empire, which, like the American Empire, could not even manufacture its own underwear by the time its final collapse came.
One place to start would be the preservation of the last remaining heavy manufacturing in America — the auto industry. That’s not going to be easy, but if the U.S. is to remain a major power, a functioning auto industry is a must, because that’s the only thing keeping U.S. manufacturing from total collapse right now at which point our current lead in weapons technology will become useless because we will no longer have the capability to manufacture those weapons. Ottoman Empire. Seriously.