Fisher Investments Editorial Staff
Politics, US Economy

The Threat of Tit for Tat

By, 09/30/2010

Story Highlights:

  • One of the most enduring economic lessons of the bleak 1930s is the peril of protectionism.
  • The House of Representatives is intent on passing a bill to impose tariffs on imports from currency-manipulating countries, likely targeting China's currency policy.
  • Unfortunately, history (and common sense) suggests protectionist policies simply result in a negative domino effect.

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One of the most enduring economic lessons of the bleak 1930s is the peril of protectionism. The US Smoot-Hawley Tariff Act ignited a retaliatory global trade war hurting businesses worldwide and exacerbating the severity of the Depression. So it's concerning American politicians today seem keen on new legislation to levy tariffs against countries with undervalued currencies to boost the economy.

On Wednesday, the House of Representatives passed a bill allowing the US Commerce Department to impose tariffs on imports from countries seen as manipulating their currencies to gain a trade advantage. The legislation targets China's highly controlled yuan, widely thought to be greatly undervalued to the dollar and popularly blamed for the US trade deficit and job losses.

China's already stated it intends to let its currency appreciate, though at a pace more gradual than US politicians apparently like. Taking a harder stance against the yuan could be an easy way to curry political favor ahead of November's mid-term elections, but is also a risk that seems dangerous to take. If the legislation passed and China responded not with a freely floating yuan, but with stricter rules on US imports and US multinationals, the American economy could be worse off than pre-legislation.

The problem with tit-for-tat is where does it end? Unfortunately, history (and common sense) suggests protectionist policies simply result in a domino effect with other countries moving to counter the deleterious effects on their own exports through retaliatory tariffs or interventions in currency markets. If events escalate, a trade war could break out, hurting the global economy. The 1930s are a prime example.

The White House has yet to take a formal stance on the bill and the Senate likely won't vote on its version of the legislation until after the mid-term elections. Hopefully either politicians recall their history lessons in time or this just proves to be pre-election saber-rattling that won't amount to much.

 

*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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