Fisher Investments Editorial Staff
Globalization, Market Risks

Buy Apple Pie

By, 06/24/2009
     

Story Highlights:

 

  • China and Canada recently retaliated against Congress's "buy American" clause in this year's stimulus package.
  • Protectionist proposals, like "buy American" and its ilk, seem to threaten free trade, but they aren't likely to be nearly as detrimental as past measures.
  • Further, the free trade consensus is stronger today than ever before. History's lessons should keep the worst at bay.

________________________________________________________________

 

Since Congress inserted the now infamous "buy American" clause into the stimulus package, there's been plenty of debate about free trade. Should we protect apple pie from baklava? Mustard from hummus? Maybe we should ban foreign competitors from the US Open. That would benefit Americans, right? (If you thought last weekend's golf major championship was boring, imagine it without 1/3 of the competition!) The story of protectionism is always the same—it hurts those it seeks to protect.

 

Unfortunately, we've seen a moderate uptick in protectionist sentiment around the globe recently. For example, Canada and China retaliated against "buy American" by adding similar requirements to their stimulus packages. Heck, it's going the other way too—the US is again complaining about Chinese raw materials export restrictions to the WTO. (Funny how it's always beneficial for us to "protect" our own, but never for others to do the same—not the least bit hypocritical, right?)

 

Such trade disputes aren't new. But for years, protectionism has been on the wane. The global consensus increasingly understands that when specialization is in and autarky out, prices go down, quality up, and economies grow faster. Protectionist proposals, like "buy American" and its ilk, seem to threaten that consensus—luckily these tendencies won't likely be too catastrophic.

 

Compare the "buy American" clause to the Tariff Act of 1930 (widely known as the Smoot-Hawley Tariff). Smoot-Hawley was signed into law in June 1930, increasing 900 tariffs across the board. In comparison, the "buy American" clause only covers materials used in government stimulus projects. True, the feds are spending quite a bit these days, but compared to total imports, the scope of "buy American" remains limited.

 

Fine and good, but what about damaging retaliatory measures elsewhere? Admittedly, there've been some. But we've hardly got a trade war on our hands. Back in the ‘30s, twenty countries enacted reactionary protectionist legislation within a year of Smoot-Hawley and global trade decreased 66% between 1929 and 1934. Today, the only major trading partners to enact retaliatory legislation have been China and Canada. And like in the US, the measures only apply to stimulus-related projects. In other words, only a few countries have retaliated and on a limited basis—not nearly enough to significantly dent total global trade over the long haul.

 

The evils of protectionism were well known even during Smoot-Hawley's time—1,028 economists signed a petition urging President Hoover to veto the bill. But the consensus is far stronger today, not least because we can compare Smoot-Hawley's devastation to the last few decades of unprecedented global growth and progress. More pro-protectionist propositions may yet come down the pipe, but history's hardest lessons should keep the worst at bay.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Click here to rate this article:



*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Subscribe

Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.