Most economists agree the Depression began with the U.S. stock market crash of 1929, but it took Reed Smoot and Willis Hawley to really make it "Great."
The two U.S. politicians sought to protect U.S. workers from cheaper European imports and in July 1930 wrote a bill that hiked tariffs on 20,000 imported goods.
In one sense, it worked great.
The U.S. State Department says the Smoot-Hawley Tariff was responsible for imports from Europe declining from a 1929 high of $1.3 billion to just $390 million in 1932.
As for protecting the American worker, unemployment was at 7.8 per cent in 1930 when the bill was passed, but jumped to 25.1 per cent by 1933. U.S. exports to Europe fell from $2.3 billion in 1929 to $784 million in 1932.
Canada didn’t even wait for the Smoot-Hawley to pass before it retaliated. In their book International Economics In the Age of Globalization, authors Wilson Brown and Jan Hogendorn say Canada put new duties on 16 U.S. imports to Canada, affecting about 30 per cent of cross-border trade. A month after the bill was passed, 125 products were hit with new or higher tariffs, and Canada looked to Britain and the Empire for new markets.
'The last thing we need now is a retaliatory trade war.' —Stockwell Day, international trade minister
Now Smoot and Hawley are back.
On Monday, International Trade Minister Stockwell Day compared the provisions in the new U.S. stimulus bill to the pair.
As written, the bill would require major public works projects to favour U.S. steel, iron and manufactured goods over imported ones.
Canada sells about $11-billion worth of steel to the U.S. every year, and Day worries other U.S. industries will lobby for similar protections. Although he says he’s "cautiously optimistic" the U.S. will back down.
"Their awareness of our concern, and wanting to do something, appears genuine at this point. And we'll just keep working closely with them," Day said.
"The last thing we need now is a retaliatory trade war."
It’s an issue that forces politicians to a tough place. Whatever benefits they see to their own economies from freer trade, they must be responsive to the voters who don’t necessarily appreciate the market forces that move their jobs overseas or flood their markets with cheap foreign grain.
'Trade protectionism serves no purpose.' — Wen Jiabao, Chinese premier
British Prime Minister Gordon Brown may champion "British jobs for British workers" at a Labour party conference, but he was in a tough position this week when thousands of British workers went on wildcat strikes, protesting the use of cheaper Italian and Portuguese workers by British contractors.
Still, the laws of the European Union seem quite clear: they allow for free movement of labour.
It seems many countries speak out of both sides out of their mouths when it comes to protectionism. Here’s a look at some recent trade imbalances:
"Trade protectionism serves no purpose as it will only worsen and prolong the crisis," said Chinese Premier Wen Jiabao. China is the world's second-biggest exporter after Germany.
Well, wait a minute: The U.S. Treasury Secretary Timothy Geithner says China manipulates its currency to keep it artificially low, making its exports cheaper. Plus, the U.S. accuses both China and Russia of dumping their steel.
Kamal Nath, India’s minister of commerce, told the Davos gathering that protectionism "is a panic response" that will hurt developed as well as developing economies. He wondered how many North American auto jobs would be spared if parts companies can’t easily outsource to cheaper labour markets, like India.
Well, wait a minute: India has raised tariffs on steel to protect local producers. Plus, one of the main reasons the World Trade Organization’s most recent Doha Round of talks collapsed was because India wanted to impose a special tariff to protect poor farmers in the event of a food import surge or price drop.
"It's extremely preoccupying that one of the first acts of the new Obama administration could be a measure that is clearly protectionist and a distortion of competition," said Anne-Marie Idrac, the French trade minister.
Well, wait a minute: The European Commission says France’s subsidies to its fruit and vegetable sector, amounting to over 330 million euros over the last decade, are against the EU rules. This week, the French government moved to help the country’s media industry by providing free newspaper subscriptions to teenagers on their 18th birthdays.
Spanish Prime Minister Jose Luis Rodriguez Zapatero told his Chinese counterpart last week that both countries must reject the temptation of resorting to protectionism amid the global economic downturn.
Well, wait a minute: Madrid is offering to pay immigrant workers all the unemployment benefits they are entitled to in a lump sum if they agree to leave Spain and go home, and don’t come back for three years. About 1,400 have taken up the offer.
Russian Prime Minister Vladimir Putin warned the Davos gathering of unrestrained state interference" in the economy and of protectionism. "
Well, wait a minute:Russia plans an import tariff on steel products to protect domestic producers from cheap imports. As well, the European Commission said a Russian decision to impose additional import duties on cars to protect domestic producers wasn’t doing anything to help Russian join the WTO. Bloomberg reports the Russian central bank has spent $211 billion since August trying to support the ruble — the world’s third-worst-performing currency this year.
Do all these national stimulus and bailout packages constitute some sort of unfair government subsidy? German Chancellor Angela Merkel thinks so. "I am very wary of seeing subsidies injected into the U.S. auto industry," she said. "That could lead to distortion and protectionism.
Well, wait a minute:Germany’s government said Tuesday that the bank Hypo Real Estate Holding is too big to be allowed to fail. It’s already put 92 billion euros into the institution and is drawing up a new law that would allow the state to take over banks. It’s also in talks to help bailout individual companies like German tire maker Continental AG.
Japanese Prime Minister Taro Aso told the Davos gathering that his country would do its part: "We will resolutely fight protectionism."
Well, wait a minute: The Canadian auto workers have argued for years that Japanese car manufacturers have an unfair advantage because they keep out North American competitors while the American and Canadian markets are largely open.
"Free trade agreements should be expanded," said John A. Prasetio, chairman of the international co-operation committee of the Indonesian Chamber of Commerce and Industry. "This is important in these times when other countries are promoting protectionism and going against the rules of the World Trade Organization."
Well, wait a minute: Foreign pharmaceutical companies must establish manufacturing facilities in Indonesia if they want to distribute and sell drugs in the country.
"Protectionism won't solve the problem of the crisis. It's not fair that, now that the rich countries are in crisis, they forget their talk about free trade," Brazilian President Luiz Inacio Lula da Silva said last week.
Well, wait a minute:Last week, the Brazilian government reversed a decision that would have placed restrictions on 60 per cent of the products imported from abroad, apparently due to criticism from its neighbours.