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Fair vs. Free Trade
The other week, Barron’s Thomas G. Donlan, one of my personal favorites, had a piece on trade. Following are excerpts from his timely essay.
“It came as no surprise to hear President Donald Trump declare again that he favors government management of international business dealings. ‘I believe strongly in free trade, but it also has to be fair trade,’ Trump said in his speech last Tuesday to a joint session of Congress.
“It was no more of a surprise to hear representatives and senators and gallery guests applauding a sentiment that works against prosperity in the U.S. and around the world. Americans have been responding to such pandering for generations, setting aside their natural distrust of bureaucracy to favor authoritarian power over this vital interest.
“Nothing could be more unfair than a tariff, which taxes foreign producers’ goods so they can’t compete for local consumers’ patronage. Equally unfair are quotas, temporary embargoes, ‘voluntary’ export restraints, anti-‘dumping’ price controls, licensing requirements, labor and environmental standards, and subsidies for domestic losers.
“Never mind that the government pretends to impose trade barriers for its citizens; it is done for only a few citizens with vulnerable jobs and investments. Local consumers pay higher prices for trade barriers, and the protection rarely works for long. Even the beneficiaries would do better without it.
“Unrestricted trade is one of the few free lunches in economics, no less beneficial for being held in such general contempt.
“This is the policy that has fed, clothed, housed, and equipped Americans for more than two centuries, ever since they began to enjoy the benefit of the Constitution’s prohibition on trade restrictions among the states.
“Still, many Americans have absorbed instead the specious lessons of the 1791 ‘Report on Manufacturers’ by Alexander Hamilton, then secretary of the Treasury. Hamilton started the country on policies intended to nurture producers and handicap consumers.
“In America’s second century, however, producers nurtured in the great free-trade zone inside the U.S. outproduced the demand of their domestic markets. Mines, farms, and factories had to find export markets. World War I turned a trend into a torrent of exports to Europeans bent on self-destruction. American producers reinvested their profits in more production.
“But the trend turned. Farmers trusted their investments in machinery, especially tractors, which were the most productive new pieces of farm equipment since the invention of the mule. Their production created gluts, prices fell, their debts were called, and their bankrupt homesteads were consolidated into larger businesses, more mechanized and even more productive.
“A political effort to help family farmers by limiting foreign competition turned into the Great Depression. The Smoot-Hawley Tariff of 1930 was named for two Republicans, Sen. Reed Smoot of Utah and Rep. Willis Hawley of Oregon. Started as a farmers’ aid bill, it eventually raised duties on 900 products, with 20,000 different rates.
“The stock market had begun to slip in the fall of 1929, while the Senate was debating the tariff bill. Much worse was to come. As lobbyists helped congressmen pin more special protections for their favorite businesses onto the tariff bill, the New York Stock Exchange trembled and tumbled.
“Foreign trade was only 5% of gross domestic product in 1929, but markets are driven by prospects for change – and the prospects for a trade war were obvious. Economists still argue about causes of the worldwide Great Depression, but the stock market clearly moved from greed to fear as the bill gained strength. World trade did collapse after the aggressive, exclusionary tariff of 1930 and its retaliatory imitations in other countries. Stocks fell further after enactment than they had in 1929....
“A year later, Barron’s reported that the volume of trade – exports plus imports – had fallen by a third from the first quarter of 1930 to the first quarter of 1931.”
Wall Street History will return in two weeks.