The Magazine

The Ghosts of Smoot and Hawley

Opening skirmishes of a new trade war?

Mar 9, 2009, Vol. 14, No. 24 • By IRWIN M. STELZER
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The ghosts of Republicans Reed Smoot and Willis C. Hawley are haunting the corridors of power. The Utah senator and the congressman from Oregon cosponsored the bill that raised tariffs on some 20,000 imported items--increases that came to a whopping 60 percent on some 3,200 items. Despite pleas from no fewer than 1,028 economists and Henry Ford, President Hoover signed the bill into law on June 17, 1930.

It worked, sort of. Merchandise imports fell by $1.738 billion in the next year and half. Unfortunately, our trading partners retaliated, and our merchandise exports fell by even more--by $2.232 billion. Whether these declines were due to the protectionist measures that spread around the world we will never know: After all, it is unreasonable to expect the volume of global trade to increase, or even be maintained, in the face of a worldwide economic collapse, even without new artificial barriers to trade.

The rest, as they say, is history. Well, not quite. It is fashionable to blame the prolongation of the Depression on this act of protectionism. But at the time exports accounted for only 5 percent of our GDP, and policy errors, there were plenty. The Federal Reserve Board was still to tighten the money supply, and Franklin Roosevelt would raise taxes and burden the economy with a host of regulations, including some that effectively imposed cartel-style restrictions on large segments of the economy.

Still, Smoot-Hawley to this day is widely cited as one of the major errors made during the Great Depression. Which is why the fear of a round of protectionism dominated conversations at the recent meeting of the world's movers and shakers in Davos, and why the leaders of the G20 nations, due to gather in London in April, will be seeking assurances from President Obama that his protectionist rhetoric has been shed like so much of what he now dismisses as campaign talk.

What has the leaders of the world unnerved is the "Buy American" provision of the stimulus package. It seemed obvious to many congressmen, especially Democrats beholden to the trade unions, that the stimulus money should be spent in America to create jobs for Americans. Besides, Obama had promised to toughen the provisions of the dozen bilateral trade agreements the Bush administration negotiated with several nations, to redo the North American Free Trade Agreement that President Clinton negotiated with Mexico and Canada, and to crack down on American corporations that export jobs.

Torn between promises to trade unions to rein in trade and a desire not to offend foreign leaders so early in his administration, the man whom Charles Krauthammer has called "The Great Equivocator" emulated FDR's vagueness. Obama refused to urge Congress to delete the clause that has set our trading partners' teeth on edge. Buy American remains. But a man who can one day sign a bill calling for $787 billion in stimulus spending, the next day commit a possible $275 billion to mortgage relief, and then convene a national conference on fiscal responsibility--followed almost instantly by a speech to Congress calling for massive spending on health care, education, and green energy, among other things--is not to be held to any standard of consistency, even the debased one applied to ordinary politicians.

So Obama followed support for Buy American with a television broadcast during his visit to Canada, one of our NAFTA partners. Seeming to repudiate Candidate Obama, President Obama told a Canadian television audience,

I think if you look at history, one of the most important things during a worldwide recession of the sort we're seeing now is that each country does not resort to "beggar thy neighbor" policies, protectionist policies, that can end up further contracting world trade. .  .  . We are going to abide by our World Trade Organization and NAFTA obligations just as we always have.

Turned free trader, Obama had inserted several escape clauses in the Buy American requirement. No action will be taken that conflicts with our obligations to the World Trade Organization (WTO) or with our trade agreements. Stimulus funds can be spent on foreign procurement when buying domestic products would be "inconsistent with the public interest," when homemade manufactured goods "are not produced in sufficient and reasonably available quantities and of a satisfactory quality," or when the costs of a project would be driven up by more than 25 percent. The result is a bill that allows the president to tell the unions that he is protecting American workers, while assuring world leaders that he will have no truck with protectionism.