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A private little trade war

By Daniel M. Ryan
web posted June 15, 2009

Admittedly, the phrase "trade war" is dredged up every time a trade dispute surfaces between Canada and the United States. It makes for good copy, and affords another chance to bring out the same lesson of free trade…the case study featuring Smoot-Hawley. Thankfully, we're nowhere near a real trade war; a full-scale mobilization would have been prefaced by one of the two withdrawing from NAFTA. It's technically possible for a trade war to be launched under the treaty's purview, but only out of outrage or pique. The retaliatory provisions ensure that no (gross) gain can be captured by restricting trade.

The latitude that NAFTA gives, however, does leave scope for trade disputes. Right now, we're in the middle of one. The focal point is the "Buy American" provision in the Obama stimulus plan. Although it complies technically with NAFTA rules, there's enough hurt on this side of the border to provoke retaliatory measures. There's already a "Buy Canadian" pledge from the Federation of Canadian Municipalities, and the very prefacing of a serious dispute has engendered a real sense of unity amongst normally fractious political leaders. Canada's trade minister, Stockwell Day, noted the phenomenon last week.

So, there are would-be combatants on both sides of the border. There are also "trade pacifists," warning of the consequences, on both sides too. The most notable on the American side is an organization that pushed for the buy-American provisions earlier: the U.S. Chamber of Commerce. Given their earlier support, it's understandable why they'd take a "needs clarification" approach. Nevertheless, they have bent in a very public way.

On the Canadian side, some of the members of the Canadian Municipalities federation are already voicing disquiet due to the associated costs of the aforementioned resolution. There's no need for them to hear the Smoot-Hawley case: it's enough to face having to cut out or cut back budgetary items due to Buy Canadian's extra cost. Thankfully, that resolution is non-binding. The troubles associated with this protest measure do, though, raise questions about the efficacy of the original Buy-American provisions. If Buy-Canadian is going to hurt up here, it's plausible that Buy-American contains similar inefficiencies unnoticed afore the implementation phase. It wouldn't be the first time that fools rushed into supporting a superficially plausible measure.

The Importance Of Smoot-Hawley

Those unimpressed with the lessons of economics find it easy to categorize free trade as a "dogma." After all, every time there's some flexing of nationalist muscle, out come the canned lectures about Smoot-Hawley. Even if a big load of nothing results from said muscle being shown, we all hear about the Smoot-Hawley. Part of the reason behind the Buy-American provisions might be to test if the free traders are merely crying depression-wolf.

There's a good reason for the repetition, though, and not just because of the kernel of truth. Trade restrictions, at least on the surface, fit a Prisoner's Dilemma scenario; they also fit a Tragedy Of The Commons template. There's no better way to illustrate than through reference to a broad-swathing tariff bill, which jacked up U.S. protectionism through a tariff scheme that was branded "scientific." It was promoted as a way to shore up American production as a hedge against future tough times, and its rate increases were high enough to provoke quick complaints from America's trade partners. Although it later planted seeds that would blossom into international trade aggression, it resulted in little immediate retaliation. Perhaps this lack was the result of American aid flowing to the damaged economies of Europe; perhaps America's trading partners were waiting to see if Americans would come to their senses.

In retrospect, it got America crossing an invisible line. In the near term, though, it made free traders look silly. They became as easy to laugh at as Communists. There was no trade war ignited after its passage, and there was no immediate depression to rub in the free-trade lesson. It was a time when free traders were easy to peg as jungle-mentality medicine men, and protectionists as something akin to the Tarzan that buried another superstition-laden taboo.

This tariff was Fordney-McCumber; it was signed into law in 1922. You can imagine how easy it was to portray free traders as the fools for the rest of the decade. A "scientific" tariff, one at a rate that should have provoked trade aggression and brought poverty, seemed instead to promote prosperity. Think of how easy it would have been to portray economist critics as "dogmatists" and "quibblers" all though that seven-year timeframe.

It was certainly easy to peg them as ignorable. Consequently, when Smoot-Hawley was presented as more of a good thing, a petition signed by more than 1,000 economists failed to sway President Hoover. He criticized Smoot-Hawley on the basis of it injuring international co-operation, not because of any economic argument, and he signed it anyway. It became a law in 1930. That time, as we all know, things were different. Protectionists proved to be less like Tarzan and more like Major French of "The Old Man In The Cave." That's why Smoot-Hawley is used as the standard case study: the supposed 'medicine men' were right all along. Since trade wars do lead to trade injuries, the case study still resonates.

Forward Ho!

Nevertheless, protectionism is still clung to. This insistence leads one to wonder if protectionist measures are disguised jobs-for-the-boys measures – what we Canadians call "boodle." Columnist Dierdre McMurdy points out the presence of Buy-American provisions in ostensibly environmentalist bills...three of them.

We indeed have peeked at the treasure map of Cap'n Trade and his crew; what we see looks a lot like the same old Democrat payoff program. Shiver your timbers if you will, because Cap'n Trade is due to leave port soon. ESR

Daniel M. Ryan is an irregular columnist for LewRockwell.com, and has an undamaged mail address here.

 

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