Read The Economist's articles, "The return of economic nationalism," "The battle of Smoot-Hawley," and Business Week's article, "Jobs and Protectionism in the Stimulus Package."
Do you believe the provision of "Buy America" placed in the $787 billion stimulus package by Congress was necessary during the recession to ensure American jobs and strengthen the American Economy?
Or was this Congressional provision a form of protectionism similar to the Smoot-Hawley bill passed in 1930?
The world economy
The return of economic nationalism
Feb 5th 2009
From
The Economist
print edition
A spectre is rising. To bury it again, Barack Obama needs
to take the lead
Illustration by Jon Berkeley
MANAGING a crisis as complex as this one has so far called for nuance and pragmatism
rather than stridency and principle. Should governments prop up credit markets
by offering
guarantees or creating bad banks? Probably both. What package of fiscal stimulus would be
most effective? It varies from one country to the next. Should banks be nationalised? Yes,
in some circumstances. Only the foolish and the partisan have r
ejected (or embraced) any
solutions categorically.
But the re
-
emergence of a spectre from the darkest period of modern history argues for a
different, indeed strident, response. Economic nationalism
â
the urge to keep jobs and
capital at home
â
is both turnin
g the economic crisis into a political one and threatening the
world with depression. If it is not buried again forthwith, the consequences will be dire.
Devil take the hindmost
Trade encourages specialisation, which brings prosperity; global capital marke
ts, for all their
problems, allocate money more efficiently than local ones; economic co
-
operation
encourages confidence and enhances security. Yet despite its obvious benefits, the
globalised economy is under threat.
Congress is arguing about a clause in the $800 billion
-
plus stimulus package that in its most
extreme form would press for the use of American materials in public works. Earlier, Tim
Geith
ner, the new treasury secretary, accused China of âmanipulatingâ its currency,
prompting snarls from Beijing. Around the world, carmakers have lobbied for support (see
article
), and some have got it. A host of industries, in countries from India to Ecuador, want
help from their governments.
The grip of nationalism is tightest in banking (see
article
). In France and Britain, politicians
pouring taxpayersâ money into ailing banks are demanding that the cash be lent at home.
Since banks are reducing overall lending, that means repatriating cash. Regulators are
thinking nationally too. Switzer
land now favours domestic loans by ignoring them in one
measure of the capital its banks need to hold; foreign loans count in full.
Governments protect goods and capital largely in order to protect jobs. Around the world,
workers are demanding help from t
he state with increasing panic. British strikers, quoting
Gordon Brownâs ill
-
chosen words back at him, are demanding that he provide âBritish jobs
for British workersâ (see
article
). In France more than 1m people stayed away from work on
January 29th, marching for jobs and wages. In Greece police used tear gas to control
farmers calling for even more subsidies.
Three arguments are raised in defence of economic nationalism: t
hat it is justified
commercially; that it is justified politically; and that it wonât get very far. On the first point,
some damaged banks may feel safer retreating to their home markets, where they
understand the risks and benefit from scale; but that is
a trend which governments should
seek to counteract, not to encourage. On the second point, it is reasonable for politicians to
want to spend taxpayersâ money at home
â
so long as the costs of doing so are not
unacceptably high.
In this case, however, the c
osts could be enormous. For the third argument
â
that
protectionism will not get very far
â
is dangerously complacent. True, everybody sensible
scoffs at Reed Smoot and Willis Hawley, the lawmakers who in 1930 exacerbated the
Depression by raising American tar
iffs. But reasonable people opposed them at the time,
and failed to stop them: 1,028 economists petitioned against their bill. Certainly, global
supply
-
chains are more complex and harder to pick apart than in those days. But when
nationalism is on the marc
h, even commercial logic gets trampled underfoot.
The links that bind countriesâ economies together are under strain. World trade may well
shrink this year for the first time since 1982. Net private
-
sector capital flows to the
emerging markets are likely t
o fall to $165 billion, from a peak of $929 billion in 2007. Even
if there were no policies to undermine it, globalisation is suffering its biggest reversal in the
modern era.
Politicians know that, with support for open markets low and falling, they must
be seen to
do something; and policies designed to put something right at home can inadvertently eat
away at the global system. An attempt to prop up Irelandâs banks last year sucked deposits
out of Britainâs. American plans to monitor domestic bank lending
month by month will
encourage lending at home rather than abroad. As countries try to save themselves they
endanger each other.
The big question is what America will do. At some moments in this crisis it has shown the
way
â
by agreeing to supply dollars to
countries that needed them, and by guaranteeing the
contracts of European banks when it rescued a big insurer. But the âBuy Americanâ
provisions in the stimulus bill are alarmingly nationalistic. They would not even boost
American employment in the short r
un, because
â
just as with Smoot
-
Hawley
â
the inevitable
retaliation would destroy more jobs at exporting firms. And the political consequences would
Protectionism
The battle of Smoot
-
Hawley
Dec 18th 2008
From
The Economist
print edition
A cautionary tale about how a protectionist
measure opposed by all right
-
thinking people
was passed
Library of Congress
Hawley and Smoot, the bogeymen of trade
EVEN when desperate, Wall Street bankers are not given to grovelling. But in June
1930 Thomas Lamont, a partner at J.P. Morga
n, came close. âI almost went down
on my knees to beg Herbert Hoover to veto the asinine Hawley
-
Smoot Tariff,â he
recalled. âThat Act intensified nationalism all over the world.â
According to David Kennedy, an historian, Lamont was âusually an influential
economic adviserâ to the American president. Not this time. Hoover signed the bill
on June 17th: âthe tragic
-
comic finaleâ, said that weekâs
Economist
, âto one of the
most amazing chapters in world tariff history...one that Protectionist enthusiasts the
worl
d over would do well to study.â
The Tariff Act of 1930, which increased nearly 900 American import duties, was
debated, passed and signed as the world was tumbling into the Depression. Its
sponsors
â
Willis Hawley, a congressman from Oregon, and Reed Smo
ot, a senator
from Utah
â
have come to personify the economic isolationism of the era. Sixty
-
three years later, in a television debate on the North American Free
-
Trade
Agreement, Al Gore, then vice
-
president, even presented his unamused anti
-
NAFTA
opponent,
Ross Perot, with a framed photograph of the pair. Now, with the world
economy in perhaps its worst pickle since the Depression, the names of Hawley and
Smoot are cropping up again.
In fact, few economists think the Smoot
-
Hawley tariff (as it is most often
known)
was one of the principal causes of the Depression. Worse mistakes were made,
largely out of a misplaced faith in the gold standard and balanced budgets.
Americaâs tariffs were already high, and some other countries were already
increasing their own.
Nevertheless, the act added poison to the emptying well of global trade (see chart).
The worldwide protection of the 1930s took decades to dismantle. And bad
monetary and fiscal policies were at least based on the economic orthodoxy of the
day: economists
would tear each other apart over the heresies of John Maynard
Keynes. On protection, there was no such division. More than a thousand
economists petitioned Hoover not to sign the Smoot
-
Hawley bill. Bankers like
Lamont sided with them; so did editorialists
by the score.
The âasinineâ bill began as a much smaller beast: the plan was to help American
agriculture, which had slumped in the early 1920s. Congress passed sev
eral bills to
support prices and subsidise exports, but all were vetoed by Calvin Coolidge,
Hooverâs predecessor. With no obvious logic
â
most American farmers faced little
competition from imports
â
attention shifted to securing for agriculture the same
sort
of protection as for manufacturing, where tariffs were on average twice as
high. To many of its supporters, âtariff equalityâ meant reducing industrial duties as
well as raising those on farm goods. âBut so soon as ever the tariff schedules were
Jobs and Protectionism in the Stimulus
Package
President Obama's spending bill promotes the use of
American goods and labor. Despite foreign and domestic
protests, the language is mainly rhetorical
Members of the Senate and the House hash out differences between the two versions of the
economic stimulus legislation at the U.S. Capitol on Feb. 1
1
Chip Somodevilla/Getty Images
By
Moira Herbst
The $787 billion spending legislation being signed on Feb. 17 by President Barack Obama is
designed to jolt some life into a moribund economy. Already, though, provisions to use the
mo
ney to "buy American"
â
whether that means American iron, steel, or labor
â
is sparking a
debate about whether such rules in a global economy amount to protectionism.
Organized labor and small U.S. manufacturers won an amendment to the stimulus bill to ensure
that more materials used on construction and infrastructure are made in the U.S. Critics of the H
-
1B visa program won tougher rules governing when banks that are bailed out by the Troubled
Assets Relief Program (TARP) can fill jobs with skilled immigrants
.
The final language drew criticism from abroad, where editorials and government officials
warned it could run afoul of trade agreements. But both provisions are less stringent than earlier
versions had been, and neither is likely to have a radical effect
on how stimulus spending takes
shape.
Opposition from Exporters
The clearest attempt to wall off foreign companies from U.S. spending came in a "Buy
American" provision. That rule requires that only U.S. iron, steel, and other manufactured goods
be used
for public buildings and public works funded under the bill. However, it comes with
several key caveats.
For one, the language states that the Buy American po
licy must not violate
U.S. obligations under existing international trade agreements. Nor does the rule apply if
American goods aren't available in sufficient quantities or if they'll increase the cost of the
overall project by more than 25%. Federal highw
ay, transit, and airport projects are already
covered by similar Buy American requirements.
The battle over the provision had been contentious. On Feb. 3, 100 business groups and
companies
â
including the U.S. Chamber of Commerce, General Electric (
GE
), Caterpillar
(
CAT
), and other major construction, defense, and
high
-
tech companies
â
wrote a letter to Senate
leaders warning that a far
-
reaching Buy American rule "will harm American workers and
companies across the entire U.S. economy, undermine U.S. global engagement, and result in
mirror
-
image trade restrictions abr
oad that would put at risk huge amounts of American exports."
But advocates of the provision
â
including the Alliance for American Manufacturing, a
partnership of manufacturing companies and the United Steelworkers union
â
said
such rules are
needed
to stem the tide of layoffs in the U.S. construction and manufacturing sectors.
Coalition Claims 'Major Victory'
In negotiations, the Obama Administration sought to r
econcile the opposing sides. White House
spokesman Robert Gibbs told reporters on Feb. 12 that the final bill achieves this. "I think where
we ended up with the Buy America provision is the right compromise that respects the Buy
America laws that we've had
on our books for many, many years while also ensuring that the
language doesn't create unnecessary trade disagreements in a time of economic crisis," Gibbs
said.
Scott Paul, executive director of AAM, said in a prepared statement that the resulting langu
age
was "a major victory for American manufacturers and workers." He said: "Buy America is good
news for laid
-
off workers in construction and manufacturing, and good news for the global
economy by helping to spur U.S. growth."
That's not how it was receive
d overseas, however. Robert Zoellick, president of the World Bank,
told
The New York Times
that
it was crucial to avoid the protectionist policies of the 1930s. "The
Buy Ame
rican provision is very dangerous," he said. At the Group of Seven meeting of world
financial leaders in Rome last week, U.S. Treasury Secretary Timothy Geithner was pressed to
assure other countries that the Obama Administration would remain committed to
free trade.
