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Wednesday, September 29, 2010
The Protectionist Threat of Another Great Depression
By Heritage Foundation @ 10:41 AM :: 2998 Views

www.Heritage.com

A financial bubble fueled by easy money and loose credit bursts. Unemployment shoots up, and gross domestic product falls sharply. Some in the U.S. Congress blame foreigners for unfair trade practices and pass a trade bill that prompts widespread retaliation, exacerbates the popping of the bubble, and sends the country into further economic trouble. That is what happened with the Wall Street Crash of 1929, the Smoot–Hawley Tariff Act of 1930 and the Great Depression. Americans might hope our leaders would learn from our past mistakes. But the leftist majority in Congress, aided by some misguided members of the minority, is trying to repeat this terrible history.

At issue is H.R. 2378 or the Currency Reform for Fair Trade Act. The bill would grant new powers to the Obama administration, allowing them to raise tariffs on imports if the Commerce Department determines that an exporting country is manipulating its currency. Its not known what President Obama would do should this bill hit his desk. A real leader would let it be known loud and clear that it faces certain veto. The protectionist proponents of this bill believe that Chinese currency manipulation is artificially lowering the price of Chinese goods imported into the United States while inflating the price of U.S.-made exports. In 1930, the protectionists thought they could help American manufacturers by punishing foreigners. They were tragically wrong. The same misguided logic is being applied to China now. Heritage Foundation Research Fellow Derek Scissors explains why higher tariffs on Chinese imports would not help the U.S. economy:

Applying duties to Chinese goods would not suddenly make the American textile, toy, furniture, or even computer-assembly industries globally competitive, and these are the primary imports from the PRC. Globalization means the U.S can punish China, but it cannot simply turn Chinese losses into American gains.

The Congressional Budget Office certified this analysis yesterday when it released a report showing that the new tariffs would raise only $20 million a year compared to the more than $1 billion a day in trade the United States does with China. The reason: “Many imports do not injure domestic firms because there are no competitors currently operating in the United States.”

But while raising tariffs on Chinese goods would have no economic benefit for the U.S. economy, it would definitely risk much wider economic harm. Morgan Stanley Asia chairman Stephen Roach warns in today’s New York Times: “China could very well retaliate against American exporters, and buy goods from elsewhere (a worrisome development in what is now America’s third-largest export market).” And former U.S. trade official Timothy Stratford tells Bloomberg: “This step would make it harder for us to export to China, not easier.”

China is no angel here. Its June announcement of an end to the dollar peg was fraudulent, and the exchange rate is only one part of China’s non-cooperative policy. And the mainstream media is just beginning to notice that the country’s Communist Party has been exercising more and more state control over the economy. But then again, so has our government with massive bank bailouts, government ownership of car companies, and a government takeover of the health care sector. Our answer to China must not be, cannot be, to become more like China.

Instead of going down a path toward protectionism and yet more government control of our economy, we must return to our nation’s strengths: free trade, the rule of law and a commitment to free enterprise. We must make the United States a better place to do business. Cutting the corporate tax rate, reducing government involvement in commercial decision making, reining-in runaway spending and deficits, freeing our businesses from red tape, and unleashing our natural resources to meet our energy needs: this is what Congress should be doing to return us to economic prosperity.

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