Tuesday, February 03, 2009

"Buy American" provisions in the stimulus bill may harm America in the long run

One provision in the stimulus bill would make infrastructure companies purchase their raw materials from American companies unless they could demonstrate a cost difference over 25%. Steel companies were mentioned at one point; China provides state subsidies to its steel producers, which would artificially lower their costs, whereas many American steel firms are running well below capacity and have laid off workers. Proponents say the buy American provisions will keep more of the money at home, and in the short run, they are probably right.

However, there's a larger context to think of, as David Andelman writes for Marketwatch.

The one measure that could indeed catapult us that final leg into full-fledged depression would be to revisit the errors of the Smoot-Hawley Tariff -- that catastrophic move by a group of Congressional know-nothings in 1930.
Three Republicans orchestrated the measure, including the handsome, gregarious American president, Warren G. Harding. Harding had no idea how instrumental his ridiculous economic program, designed to prolong the Roaring '20s boom time when debutantes drank champagne from gilded slippers, was in plunging the nation into recession.

On Capitol Hill, Rep. W.C. Hawley of Oregon and Sen. Reed Smoot of Utah pushed through the tariff that left their names chiseled in infamy for its catastrophic consequences. Signed into law with fanfare on June 17, 1930, it raised duties on 20,000 imported goods to record levels. More than 1,000 economists signed a protest against it. But it was too little, too late.

By 1932, when the U.S. officially entered the Great Depression, imports plunged to half their 1929 highs, as did exports. European nations, feeling pain equally if not more intense than the U.S., raised their own tariffs that choked off imports from America.

Thousands of factories went idle as total world trade plunged by two-thirds between 1929 and 1934. By 1933, unemployment had soared to 25.1% in the United States. By 1937, tariffs had begun to fall again.


Last summer, before the real dangers of global economic collapse became painfully apparent, the latest Doha Round of WTO talks dissolved in a welter of recriminations between rich and poor nations. The stage was set for each country to begin to look after its own interests.

If such a movement gets up a head of steam, only global disaster can result. And such a scenario is by no means unthinkable.

Already, France's Sarkozy is looking for an extraordinary meeting of the heads of state of the various Eurozone nations in an effort to bring fiscal discipline to each national budget as the common currency begins to spiral downwards out of control. Should the Eurozone begin to fracture, a host of protectionist measures can only be the next, and by no means the final, resort.

In the 1920s, it was Europe that effectively led the world into Depression. As I point out in my book, " A Shattered Peace: Versailles 1919 and the Price We Pay Today," the western Allies, in their efforts to bankrupt Germany after the First World War and make certain it never again posed a military threat, all but choked off expansion in Europe.

Though America in those days saw itself as a largely self-sufficient island of growth and development, it was not by any means as isolated as it believed.
Today, the world sees the U.S. and its profligate policies of easy credit and lax regulation as precipitating the global economic catastrophe. Should Buy American expand into a broader, beggar-thy-neighbor attitude, then the $800 billion bailout now before Congress may be only the first installment of a colossal price tag needed to spend our way back to expansion and prosperity.

The US may have a growing trade deficit, but it also does export a great deal, especially in high-technology capital goods and software. In the short run, the protectionists may achieve their goal, but retaliation from other countries could have profound consequences. I believe that Christians should not generally endorse economic protectionism because it may deny someone somewhere else the chance to make a living wage. In the particular case of the stimulus bill, there may be reasons to reconsider.

Additionally, the US government will eventually have to take action on the country's trade deficit, which has been accumulating for years (the country imports more than it exports, which represents a net transfer of wealth out of the country). Warren Buffett has proposed a tax on all imports; countries that require foreign aid could be given exemptions from that tax. That, somehow, seems more fair to me because it's tied to a long-run social problem. The protectionism in the stimulus bill, on the other hand, seems short sighted and jingoistic.

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