How have U.S. protectionist trade policies affected global trade since 1930: lessons for the US-China trade war.
Ever since the 1980s, before he showed interest in politics, President Trump had advocated trade restrictions, especially on tariffs because in his point of view, to decrease the trade deficit and promote the domestic manufacturing industry, those trade restrictions are seen as necessary procedures. He said that the US is getting ripped off by other trading partners/competitors and imposing such kinds of trade restrictions was a key proposition his presidential campaign made.[1] While some politicians and economists claim that the trade deficit the US is experiencing is not a huge problem, and only a handful of professionals think tariff is the ultimate solution, in the historical context, not a single trade-war that was escalated due to imposing tariffs, retaliating, and so forth, never actually benefitted any countries so far which also means there was no winner when it comes to economic sanctions between countries.[2]
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The trade war between the US and China has been an ongoing global issue for over a year now. Because of this massive trade war between the two most powerful countries in the world, any other issues regarding the local economy became a relatively minor factor. This rise of protectionist trade policy is nothing new when you look back in history. There were rise and fall of all kinds of protectionist trade policies but eventually, they were terminated because protectionist trade policies limit the potentials of domestic industries. Protectionist trade policies, while purporting to help the national economy, actually harm it and in doing so create a chain reaction that harms the global economy.[3]
The Smoot-Hawley Act in the 1930s after the Great Depression caused lawmakers to impose severe protectionist policies such as tariffs, import quotas, currency control, and more. When the US imposed such laws, other countries also imposed their own trade restrictions on international trade to counter the effect of the new protectionist policies by the US. Because other countries also retaliated against US policies, it made it even harder for the US to overcome the impact of the Great Depression. Imported goods were largely unaffordable for most of the consumers, so the only option for consumers was to buy domestic goods which tanked global trade by about 65 percent. After the stock market in the US took a nosedive in 1929, the most severe economic depression that we now call the ‘Great Depression’ started and it eventually lasted until the end of the 1930s.[4] There are a lot of comparisons between the Great Depression and other economic downturns, but even the mortgage crisis in 2008, statistically speaking, doesn’t come near how much effect the Great Depression had on the world economy.
There are lots of theories and studies about why the Great Depression happened from various perspectives, but I want to emphasize some of the points that the recent study has in common. (usually non-monetary explanations) The common points among the studies are about the government’s role when it comes to economic stability. First of all, the government should pursue the goal of keeping a stable growth path regarding money supply and/or aggregate demand. When there is a projection or forecast that there will be an economic downturn, central banks should make the effort to pour liquidity into the banking system by decreasing discount rates, lending out discount loans to banks so that there are excess reserves in banks and more money supply in the market which would stimulate spending that would maintain the nominal demand from collapsing. However, the Federal Reserve believed that maintaining a balanced government budget is the right way to manage the economy. They simply thought that the economic downturn was a good phenomenon because any business or bank would not survive during the economic downturn and there would be healthier businesses and banks that take place and therefore, the economy would start going again.[5] From today’s point of view, the actions of the Federal Reserve are as stupid or ignorant as anyone can be. It is the same thing as saying leave the sick to die and there will be more babies that would replace those who are dead. But when you think about it, babies don’t come out automatically when someone dies, humans have to go through procreation to have more babies. It is the same thing for the economy, there should be some government organization to stimulate more money supply so that there would be new businesses and banks to replace those that are gone. The Feds just watched and did nothing when the entire world collapsed.
After the Great Depression, countries all over the world, out of fear that their economy would become worse, started imposing severe protectionist trade policies. But despite the increased measure of protectionist trade policies, there was still substantial cross-country variation in the movement to protectionism. Countries that maintained gold standards imposed higher tariffs, more import quotas, and tighter exchange controls compared to countries that went off gold. Eventually, we know that the world leaders agreed to move away from gold and created a new global trade economy based on dollars.[6] According to Claude Barfield, who is a resident scholar at the American Enterprise Institute, the U.S. had not been fully onset of the issue regarding the Great Depression. They simply did not understand the cause of the depression and the solutions they came up with even worsened the aftermath of the world’s most devastating economic downturn. The consensus among Congress and President Hoover was if they raised taxes on every imported good that was coming into the U.S. regardless of where those goods came from (basically talking about tariffs), this imposed tax would be able to protect U.S. companies and farms and by doing that it would also protect the economy. Many professionals even back then argued against the decisions Congress and the White House made because it would hurt the economy rather than help it. As soon as President Hoover signed the bill, the stock dropped the next day. The market knew that if this law went into action, it would just make things worse. The Smoot-Hawley Act not only prolonged the effect of the Great Depression in the U.S., but it also affected other countries in the world negatively. Starting with the ‘Reciprocal Trade Agreements Act’ in 1934, the U.S. started negotiating terms of trade with other countries individually rather than imposing consistent tariffs across nations.[7] After the U.S. government realized what they did only worsened the situation, they should have retreated what they did but instead of doing that, the U.S. used relief of imposed tariffs as a bargaining chip with other countries. Consequentially speaking, the policies the U.S. imposed after the Great Depression only stimulated tensions between countries related to trade and eventually everything went back to how it was. From a very subjective point of view, they just wasted a decade because of wrong remedies after the global economic shock.
After the dark ages of World War II, many countries felt the need for tighter relationships and multilateral agreements so that countries could benefit from each other as well as a method to prevent means of conflict. The best way to prevent conflict and hostility is to have mutually beneficial agreements so that one country won’t simply go to war with other countries and sacrifice all the mutual benefits. The ‘General Agreement on Tariffs and Trade’ was established to promote and stimulate international trade by reducing and/or eliminating trade restrictions and barriers such as tariffs, quotas, etc. Between 1948 and 1994, before the World Trade Organization was founded, the GATT made rules for most of the world trade and led over the periods that had the highest growth rate related to international commerce. Even though it was just a provisional agreement and organization, for those 47 years, it seemed successfully established despite some questions that were raised regarding having no means of authority over trade agreement violations.[8] Even though GATT was formed to serve multilateral trade agreements, since it was only an agreement between countries without proper authority to watch over, there were multiple cases where countries formed plurilateral agreements devoted to selective trading and caused conflicts among members. After experiencing some limits because GATT was merely a provisional organization, the members of GATT were eager to step further by creating the World Trade Organization in January 1995. The creation of WTO is a significant step towards international trade because not only does WTO set rules agreed upon between different nations, but it is an intergovernmental organization that has its headquarters and staff and it also includes service sector and intellectual property rights which are crucial in the modern-day business environment especially with trade.[9]
There have been lots of speculation about why there is a rise in demand for protectionist trade policies among voters and at the same time hatred against immigrants in the U.S. and by now it is obvious that people who claim that it is for the benefit of our nation doesn’t know most recent studies related to trades. One thing particular about the U.S. is that the manufacturing industry has been struggling for some time now ever since the rise of other countries when it comes to global trade. Usually, manufacturing companies relatively do not have a high profit margin so, for them to cover costs and make a profit, the best way to do it is by cutting costs. The easiest way to cut costs is cutting wages, and filling up employees who are desperately in need of a job. When it comes to being desperate, immigrant workers are one of the most desperate people needing jobs in the nation. So, companies started lobbying governments to be lenient about immigration laws and bring more immigrants so that they could have enough labor and stop giving higher wages to Americans who were already working for them.[10] Another factor that comes in is that most of the manufacturing factories are located in states where rent is cheap which is called ‘Rustbelt’ and most of those states don’t have much diversity when it comes to demographics. When it comes to finding the cause of what happened, people tend to find easier targets to blame rather than trying to find a series of the reasons why it happened. It becomes even worse when there are only similar people around you, and you won’t find anyone else who has different opinions as you do. You will become more convinced with what you think even though that’s not what caused the struggles you go through since everyone else around you thinks the same way and therefore, the hatred is formed.[11] Protectionism logic today in politics states that everybody outside this country cannot be trusted and they are taking advantage of the US, therefore, we should do the same thing and retaliate. It feeds off of hatred that is already built, and it is so easy to convince the people who already think they are the victims of the inflow of foreigners or foreign goods. It is somewhat true that they are the victims of the inflow of immigrant workers and wage cuts but that’s not what immigrant workers formed, it is rather their employers who did that to them and a lot of times, politicians who they voted for.
When it comes to trade disputes among countries, there were no winners on any occasion. During an economic downturn, people tend to find blame outside rather than inside their own country, and usually, politicians take advantage of people and give them someone to blame usually people who don’t have much voice (immigrants, low-income families, minorities). It happened before and it is happening again, in the modern world. It is a fact that the Chinese government has funded its firms (Huawei, Alibaba) to take illegal actions such as corporate spying, and implementing devices that helped them to spy on other companies in the US.[12] There are legal actions you can take through WTO, World Bank, and IMF to restrict the Chinese government from doing such illegal actions but rather than doing that Trump administration has taken actions that are too extreme that not only hurt China, but it also hurt as much internally especially the majority of the consumers. Just because it is an easier way to impose tariffs and go to a trade war, it doesn’t mean the government should do it when it hurts its people. The first obligation of the government is to work for the people of the country and when the government imposes certain policies that hurt their own, you can’t say that it’s the right course of action. There is always a proper way of doing a job.
Bibliography
- Leonard, Jenny. 'Trump heaps more tariffs on China, still no deal in sight.' Business Report (Cape Town, South Africa), September 2, 2019. NewsBank: Access World News – Historical and Current. https://infoweb.newsbank.com/apps/news/documentview?p=WORLDNEWS&docref=news/175B57922DD4AA80.
- Eckes, Alfred E. “Opening America's Market: U.S. Foreign Trade Policy since 1776.” Chapel Hill: University of North Carolina Press, 1995.
- Johnson, C. Donald (Clete Donald). The Wealth of a Nation: a History of Trade Politics in America. New York, NY: Oxford University Press, 2018.
- Eichengreen, Barry, and Douglas A. Irwin. 'The Slide to Protectionism in the Great Depression: Who Succumbed and Why?' The Journal of Economic History 70, no. 4 (2010): 871-97. http://www.jstor.org/stable/40984781.
- White, Lawrence H. “Did Hayek and Robbins Deepen the Great Depression?” Journal of Money, Credit, and Banking. 40, no. 4 (2008): 751–68. https://doi.org/10.1111/j.1538-4616.2008.00134.x.
- Long, J. Bradford De. “‘Liquidation’ Cycles: Old-Fashioned Real Business Cycle Theory and the Great Depression,” December 1990. https://doi.org/10.3386/w3546.
- Little, Becky. “The Great Depression Lesson About 'Trade Wars'.” History.com. A&E Television Networks, March 5, 2018. https://www.history.com/news/trade-war-great-depression-trump-smoot-hawley.
- “The History of Multilateral Trading System.” WTO. Accessed November 19, 2019. https://www.wto.org/english/thewto_e/history_e/history_e.htm.
- “Understanding the WTO - The GATT Years: from Havana to Marrakesh.” WTO. Accessed November 3, 2019. https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm.
- Rose, Andrew K., Daniel M. Sturm, and Jeromin Zettelmeyer. 'The March of an Economic Idea? Protectionism Isn't Counter-cyclic (anymore).' Economic Policy 28, no. 76 (2013): 569-612. http://www.jstor.org/stable/24029515.
- Phillips-Fein, Kim. 'Conservatism: A State of the Field.' The Journal of American History 98, no. 3 (2011): 723-43. www.jstor.org/stable/41510116.
- Haridy, Rich. “Huawei, the US Ban, and Links to Chinese Spying Explained.” New Atlas, August 15, 2019. https://newatlas.com/huawei-ban-us-what-spy-evidence-exists/59772/.
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