Trade

Free Markets...Anyone? Anyone?

By, 08/01/2007

Markets are discounters of all known information. MarketMinder has said this many times. Anything you, your friends, or your colleagues are talking about is either wrong or already discounted into prices. We've exhausted our commentary on the "credit crunch" this past week so we're not going to re-hash it again here.

Behind all the talk of credit, there's something else that might be spooking markets. In today's Wall Street Journal 1,028 prominent economists signed a petition against proposed punitive tariffs against China. It is symbolic because on May 4, 1930 the exact same number of well-known economists signed a similar petition condemning the Hawley-Smoot Tariff Bill. For a brief overview of that colossal mistake, we'll turn to Ben Stein doing his ad-libbed performance as the economics teacher from Ferris Bueller's Day Off:

"In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the... Anyone? Anyone? ...the Great Depression, passed the... Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act? Which, anyone? Raised or lowered? ....raised tariffs, in an effort to collect more revenue for the federal government. Did it work? Anyone? Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression."

Other governments retaliated with higher tariffs, worsening the situation. To be clear, we're far from the situation that existed in 1930 and see nothing like the Great Depression on the horizon.

But using economic isolationism as a political weapon is a dangerous game to play. Free trade should be just that - free. Any tariff or trade barrier imposed by the government is a restriction of individual choice. But using the China example can sometimes get people all hot and bothered, and we wouldn't want that. So let's use a more enjoyable example.

We assume many readers have their own local pizza place, call it Dino's. Maybe you go to Dino's every Friday night with the family. The pizza is ok, but the family seems to enjoy it and it's the only place within ten miles to get a decent slice. But a new pizza place, call it Portofino's, goes in down the street that has lower prices, and a kids playground to boot. But because Dino's is frightened with losing business (and thus jobs) to Portofino's, it lobbies the local council to punish Portofino's for charging "artificially" low prices. The local council members, long-time Dino's lovers, agree and create an extra tax specifically addressed at Portofino's aggressively low pricing structure.

Who in their right mind would support such a thing – a tax on pizza because it was too cheap and a restriction on your ability to choose the pizza you want to eat? You guessed it, the US government. The premise is that goods from China are too cheap! To remedy this crazy attempt to attract business, increasing Americans' prices for goods is the way the US government fights back.

Clothes, electronics, the battery for our Prius and thousands of other goods are increased in price as a result of this tariff, or calling it what it is, a tax on the consumer. Heck, we haven't looked at where our pizza boxes come from lately, but maybe those will go up as well!

Luckily, Congress seems to be experts at talking the talk but not walking the walk. And we firmly believe that President Bush is ready to use that veto pen if any major tariff or barrier to trade makes it to his desk. But maybe, just maybe, the market is sending a message against this economic populism. Let's hope Congress hears it more than Ferris in econ class or else we'll all be paying more for pizza, or worse, sausages made by Abe Froman.

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

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

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