`

BOHANON & STYRING: Playing politics with tariffs an unwise course

March 12, 2016

Economic AnalysisCarrier is moving its Indiana operations to Mexico. This will no doubt spark more campaign talk about getting better trade deals.

One has to sympathize with the Carrier employees about to lose their livelihoods. But threatening high tariffs, 45 percent in the case of China, as a bargaining ploy to somehow get a better trade deal (whatever that means) is playing with fire. Tariffs are a bargaining chip only if you’re prepared to follow through on the threat. The old saying goes, “Don’t take a hostage unless you’re prepared to shoot him.”

Tariffs provoke retaliation. Pretty soon you’re in a trade war. The objective of protecting American jobs winds up costing many times more jobs than the ones you set out to protect.

Consider the Great Depression of the 1930s. The economic numbers in mid-1930 said we were in a moderately severe recession. The unemployment rate was 8.7 percent. Nothing suggested we were headed for a decade of economic disaster. However, the unemployment rate rose to around 15 percent in 1931 and to 23 percent in 1932. It never fell back below 9 percent until World War II. What happened to turn the downturn into a catastrophe?

Economists and historians still debate the proximate causes of the Great Depression, but most agree it was accentuated by the Smoot-Hawley tariff.  

Congress began considering tariff revisions after Herbert Hoover’s inauguration in March 1929. After much legislative vote-trading, a final bill passed in June 1930 increasing tariffs on nearly 900 imported goods. Hoover reluctantly signed it.

We say reluctantly because Hoover had warned in April 1929 it was “unwise” to try to increase employment by restricting imports if it led to “sacrificing” greater employment through a loss of exports.

This view was bolstered by the 1,028 economists who signed a petition urging Hoover to veto Smoot-Hawley, arguing, “the more we restrict the importation of good … the more we reduce the possibilities of our exporting to them.” They went on to conclude “we cannot increase employment by restricting trade.” They also warned the bill would “inevitably provoke other countries … (to levy) retaliatory duties.”

Nevertheless, the bill passed, and our trading partners predictably retaliated. World trade shrunk precipitously from $5.3 billion in January 1929 to $1.8 billion in June 1933, a 66 percent decline. Jobs in U.S. export industries evaporated.

Smoot-Hawley wasn’t the only cause of the Depression but certainly was a contributor.

Threatening a trade war scares us to death.•

__________

Bohanon is a professor of economics at Ball State University. Styring is an economist and independent researcher. Both also blog at INforefront.com. Send comments to ibjedit@ibj.com.

ADVERTISEMENT

Recent Articles by Cecil Bohanon / Special to IBJ

Comments powered by Disqus