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US-China Trade War Erupting: Remember Smoot-Hawley?

By Calvin Massey

The Financial Times is reporting that the Obama administration's decision to impose special high tariffs on Chinese auto tires has caused China to consider retaliatory trade barriers against imposts of American poultry and autos.  Chinese tires are, of course, but one sector in a large spectrum of international trade, but it is not a good sign.  You may recall the Smoot-Hawley tariff of 1930, which raised tariffs on broad categories of goods imported into the US.  Other nations retaliated, with the result that American exports to Europe declined by two-thirds in two years and American imports from Europe declined by a bit over two-thirds in the same period.  Though not the only reason for plunging the nation into the Great Depression Smoot-Hawley was certainly an important contributor.  So far, the Bush and Obama administrations, with the help of Ben Bernanke and the Fed, have managed to avert financial crisis and inject liquidity into the economic system.  Give them a  big plus for that, and thus avoiding the huge mistake of the Fed in the 1929-1930 period.  But this gambit strikes a distinctly sour note.  Not only is it a possible harbinger of a destructive trade war, it put the US into an antagonistic position with our largest creditor.  At a time when the Obama administration plans to increase our external debt to well over our GDP, this is not smart.  Who do they think will buy that debt?  

Full post as published by The Faculty Lounge on September 14, 2009 (boomark / email).