Smoot-Hawley 2009?

My thoughts on the new tariff:

Government policies always have unintended consequences; however, the consequences resulting from Obama’s new protectionist measure will be severe and predictable. I assume that in an effort to “jump-start” the American economy, President Barack Obama has decided to impose a 35% tariff on Chinese tires. Most economists, from almost all economic ideologies, agree that free trade helps maximize economic production and economic well-being. However, Obama’s new tariff will not just contribute to further economic turmoil, it will cause death and destruction. I know, I know, this sounds extreme. But it is a logical certainty that if this tariff is imposed, President Obama will have blood on his hands. I would argue that President Obama is committing the same mistakes that President Hoover committed.

By definition, a tariff imposed on an imported good is a tax on consumers of that good. Presumably, American consumers buy tires made in China because they are cheaper and/or of higher quality. By taxing tires, consumers will be forced to pay for more for tires meaning that they will be marginally less wealthy. This is true by definition. Less disposable income will lead to lower demand and diminished purchasing power in the economy. Even working within the traditional Keynesian framework this would have disastrous effects. Also, imposing this tariff could lead to a trade war that could affect the trade of many other goods. A decline in world trade is already hurting the economy, and further restrictions could be devastating. One only needs to look at Hoover’s Smoot-Hawley tariff to see the disastrous effects that protectionism can wreck on an economy that is already in recession. It is generally well accepted that Smoot Hawley accelerated the American economy’s slide into depression; this new tariff could lead to further tariffs that would have a worse effect because today’s world economy depends so much more on global trade than ever before.

There is no and can be no economic rationale behind this tariff. It is a payoff to industries and unions that supported Obama. It is an attempt to help a few industries at the expense of the American and the world economy. While the Obama campaign promised that his administration would not be swayed by special interests. This was a broken promise, as his administration has participated in the same type of special interest pandering as President Bush. There has been no change in Washington.

I am willing to claim that Obama will have blood on his hands if this tariff takes effect. By making tires more expensive, some consumers will inevitably put off their purchasing of new tires to a later date when they can afford it. It is logically certain, that, in turn, some marginal group of people will get into an accident due to overly worn tires. This may be a small group, but it will exist. However, the specific incidents will be impossible to identify, so Obama will be not be blamed. This is the law of unintended consequences. Most government policy attempts ignore this law.

I have mixed feelings about China’s retaliatory tariff. I hold the view that the freer the trade, the better. So in this sense, I should be totally and completely against China’s tariff, and this was my initial reaction. However, I think the issue is far more complex. Adam Smith, one of the initial thinkers who understood the benefits of the free market and free trade, also understood the retaliatory tariff as a means to freer trade and more open markets. If China’s retaliatory tariff convinces American policy makers to remove our economic sanctions on foreign goods, then I would consider the tariff to be a good thing. However, there is always the danger of allowing a series of retaliatory tariffs to lead into an international trade war with devastating consequences. We really are on the brink of an economic collapse. Bad economic policy can force the U.S. and the world economy into a severe and prolonged economic depression.