There is a current example of how well extremes of self-sufficiency work - North Korea ... when Smoot-Hawley came in, Canada was among the hardest hit, and the first to retaliate in self-defence, big tariff walls went up against US goods and that's why british cars predominated here from the 30s to the 50s ... appliances, electronics, furniture, household goods, and machinery all came from Commonwealth countries or from Europe then, and that's where we sent our exports ... it was like we had become an island, and while it hurt bad for a while, we made out alright in the end, were able to go straight to work beating the nazis in sept '39 ... we could be an island again, if we had to
'Memo to U.S.:Protectionism experiment tried in 1930 and didn't turn out well
Sun Feb 1, 12:56 PM
Julian Beltrame, The Canadian Press Email Story IM Story Printable View
By Julian Beltrame, The Canadian Press
OTTAWA - In the months following the great stock market crash of 1929, the world was staring down into the economic abyss in much the same way as today.
Economies around the world were in shambles, there was fear and uncertainty of what lay ahead, and protectionist forces in the United States - ground zero of both the problem and hope for recovery - were thinking of ways to shelter local industries and jobs.
What they came up with was a law called the Smoot-Hawley act that hiked tariffs to all-time highs on some 70 agricultural products and 900 manufactured items.
What happened then is a hard lesson that many had thought had been well-learned, especially by American lawmakers, until last week's inclusion of a knee-jerk protectionist measure that stamped a "buy America" dictum on President Barack Obama's US$819-billion economic stimulus package.
The provision is causing consternation in Canada, and some threats of reprisals in some other countries, in part because only months ago world leaders had agreed that the worst thing they could do now is revert to knee-jerk protectionism.
In his closing address to the leaders summit in Peru last November, Canadian Prime Minister Stephen Harper talked about what governments did wrong after 1929, particularly erecting high trade walls.
"We must remember, notwithstanding our current difficulties, the prosperity generated around the world (were helped by) ... removing protectionist barriers and easing trade restrictions. Now is the time for opening doors, not for erecting walls," he argued.
And in public statements at least, world financial leaders are repeating the same mantra.
On Saturday, Canadian Finance Minister Jim Flaherty said his colleagues attending the World Economic Forum in Davos, Switzerland were united in opposition to the U.S. measures and "that protectionism needs to be avoided, that protectionist is a direction we need not go."
Yet, protectionism is in the air not just in the U.S. but in many countries around the world as the severity of the economic crisis hits home and pressure builds on governments to do something to save domestic jobs and industries.
"It's not an irrational instinct," says economist Nicholas Rowe, who is a member of the C.D. Howe Institute monetary policy panel.
"It's perfectly rational for each country to try and stimulate demand for its goods and labour at the expense of everybody else. The trouble happens when everybody else does it."
It must be stated that today's economic crisis, which has been called the most serious since the Great Depression, is not on the same level.
So far, North American stock markets have lost about 40 per cent of their value from their peak last spring, gross domestic product has declined only in the past quarter or so, and the unemployment rate remains well in single digit territory.
In the Great Depression, up to a quarter of the working population did not have a job.
In the three or four years that following the Oct. 24, 1929 market crash, the New York stock market lost 89 per cent of its value, the US. gross national product fell 42 per cent, and unemployment reached 25 per cent.
But what is particularly instructive to today's situation is that most of the carnage occurred after the June 1930 enactment of Smoot-Hawley. Before that law, the New York index had been hovering around 240, down but not at death's door. Two years later the index was barely breathing at 41.
Economists are split about whether the law, which touched off retaliatory measures from Europe and Canada, turned a deep recession into a protracted depression, but they are unanimous on one point - it made a bad situation worse.
What is not in dispute is that between 1929 and 1934, world trade declined 66 per cent and much of that carnage can be placed squarely at the foot of Smoot-Hawley.
Could it happen again? Yes and no, say analysts. The protectionist sentiment in the United States is real, but is mainly aimed at China, where hundreds of thousands of U.S. manufacturing jobs have moved to in the last two decades as the Asian giant becomes a growing industrial power.
Canadian Liberal senator Jerry Grafstein happened to be in Washington last week when he learned about Congress' efforts to load the Obama stimulus with "buy America" provisions for iron, steel and possibly manufactured goods.
He said he immediately went to Capitol Hill to get the mood of the lawmakers and was shocked at what he heard, particularly from Democratic senators.
"I talked to 12 senators and this thing is coming down the tracks like I've never seen before," he said. "I said to one senator who's a friend of mine, 'This is protectionist stuff," and he said, 'If this creates more jobs in my state, that's OK.' He wasn't just tweaking my nose, he believes that."
Canada and the United States are the world's largest trading partners, with US$560 billion of two-way trade in 2007. About 40 per cent of Canada's annual economic output is exported to the United States, while Canada is the leading export market for 36 of the 50 U.S. states. About seven million U.S. jobs depend on U.S. trade with Canada. Rising protectionism would hurt both countries, economists say.
But 2009 is not 1929, says Carleton University trade policy expert Michael Hart.
While he worries about protectionism, not only in the U.S. but also in other countries, Hart cautions that nothing much has happened yet.
At the moment, the "buy America" provisions have not passed into law and Obama spokesman Robert Gibbs said Friday the administration is "reviewing that provision," although Vice-President Joe Biden said he believes some protectionist measures are "legitimate."
As well, many aspects of production between the U.S. and Canada is integrated, so that a buy American policy on steel for instance, would likely result in a swap of capacities between plants on either side of the border rather than the Canadian plant being shut out, said Hart, who is distinguished fellow of the Centre for Trade Policy and Law at Carleton University.
For example, one of Canada's major steelmakers, the former Stelco Inc., is owned by U.S. Steel (NYSE: X), so protectionism against Canadian steel exports would also hurt the iconic Pittsburgh-based U.S. steel giant.
"The structure of production has so changed that it's hard to imagine we could get the same problem," Hart points out. "The reason we have so many trucks crossing the border is not because they are carrying finished products but because they are carrying parts from one plant to another."
"It would be difficult to undo that deep knitting (in production chains) with a buy America provision."
There are other major differences which would likely mute the impact of a 21st century Smoot-Hawley bill.
Unlike 1929, the world has established international trade rules, so the World Trade Organization would likely require protectionist measures to be unwound if they break rules to liberalize global commerce.
In addition, today's governments and central banks are aggressively pursuing fiscal and monetary stimulus rather than sitting on their hands, there are now floating currency exchange rates that act as checks against isolationist policies, and most governments have social policies that cushion workers against downturns.
Even if the "buy American" provisions are approved, Bank of Montreal economist Douglas Porter says the Obama stimulus plan would still constitute a net benefit for Canada, since a U.S. recovery is essential for Canada's economic recovery from recession.
The danger arises if "buy America" turns out to be only the first tiny step to something much bigger.
"I'm more worried about the precedent it sets and the potential for protectionist measures not only in the U.S. but globally," he explained. "That would threaten to aggravate the deep downturn we've already seen in global trade and compound the weakness in commodity prices, and that will be a big negative for Canada." '
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