Fisher Investments Editorial Staff
Trade, US Economy

Minor in the Key of Kerfuffle

By, 09/16/2009

Story Highlights:

  • Two of the world's largest economies, China and the US, are in the middle of a trade spat over tires.
  • But recent protectionist measures pale in comparison to historical trade wars, the worst of which was sparked by 1930's American Smoot-Hawley Tariff.
  • New bilateral trade agreements have been signed this year, more are on the horizon, and overall trade is rising off recent lows.
  • That relatively minor infractions result in major kerfuffles shows widespread and deep-seated belief in free trade—and it keeps politicians honest.

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Two of the world's largest economies, China and the US, are in the middle of a trade spat. (Which is nothing new by the way.) Last week we looked at how far stocks have come this year—and what could derail the train. As in any baby bull market, the list of worries is long. We didn't mention trade specifically (it's one of the "others" in that list), but we've talked about it plenty. The last thing we'd want is an all out global trade war.

 

But as in every bull market, potential threats must be weighed in context. Normally, only the most dramatic and unforeseen developments derail a new bull market. What exactly constitutes dramatic? In June 1930, President Herbert Hoover infamously approved the Tariff Act of 1930 (better known as Smoot-Hawley) which radically raised almost 900 import duties. (One measly tire tariff and a possible chicken-related retaliation are paltry potatoes!) Countries worldwide reacted in kind, and world trade fell a precipitous 66% between 1929 and 1934.

 

It took 18 years and a world war for nations to begin significantly reversing the damage. The General Agreement on Trade and Tariffs (GATT) was signed by 23 countries in 1947 (effective June 1948), blessing 45,000 tariff concessions and affecting a fifth of world trade. Amazingly, the first round of GATT was just the tip of the iceberg. The seven subsequent rounds widened negotiations from solely tariffs to include a wide variety of non-tariff trade restrictions and added 100 new countries to the original 23 signatories.

 

So—are we on the brink of another trade war? Probably not. Though the latest round of GATT (now the WTO) negotiations has stalled, strong support for free trade remains. There've been a bevy of bilateral trade deals this year and a bunch more lurk on the horizon. Further, scaled to the size and complexity of the US/China trade relationship, tire tariffs are but a drop in the bucket.

 

But doesn't all the noise mean menacing protectionism lurks? Not necessarily. In fact, the noise is a good thing. That relatively minor infractions result in major kerfuffles shows widespread and deep-seated belief in free trade—and it keeps politicians honest. Protectionist sentiment generally grows during downturns. But properly scaling recent actions shows today's protectionism is little more than a tempest in a teapot.

*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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