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How to Cause Another Depression? Anyone? Anyone?

Posted By Derek Scissors, Ph.D. On September 23, 2010 @ 1:00 pm In International | Comments Disabled

An ugly financial bubble bursts. A misguided U.S. Congress responds by blaming foreigners and passes a trade bill [1] that prompts widespread retaliation and exacerbates the initial popping of the bubble. That was 1930 and the Great Depression.

Fast forward 80 years. An ugly financial bubble has burst and the U.S. Congress—having already failed with trillions in deficit spending—is now blaming foreigners. A bill in front of the House Ways and Means Committee (and scheduled to be sent to the House floor next week [2]) blames Chinese exchange rate policies for the loss of American jobs. In retaliation, it goes back to the start of the Great Depression and adds yet more protectionist measures to the Tariff Act of 1930, because the first one didn’t do enough harm.

In 1930, Congress thought it could solve America’s economic problems by punishing foreigners and was tragically wrong. The same misguided logic is being applied to China now. Proponents of the current bill claim we’re losing jobs due to the overall trade deficit, that the overall trade deficit is driven by our trade deficit with China, and that our trade deficit with China is driven far higher by the exchange rate. Each part of this is analysis is wrong [3].

At least one aspect of trade is simple: what the bigger partner does matters more. The American economy is three times larger than the Chinese economy—our policies drive the trade deficit much more than theirs do. Even on the Chinese side, the Chinese government intervenes in the economy in many unfortunate ways, not just through the exchange rate. Changing the exchange rate alone will do almost nothing to change U.S.-China trade.

If this bill did shrink the U.S.-China trade deficit, it wouldn’t shrink the overall American trade deficit. Countervailing duties or other actions can make China-based production more expensive but they can’t move the production here. Production of clothes, of furniture, and toys can be forced out of China, but will go to India, Vietnam, and other low-cost areas. So will final assembly of advanced items such as computers. The trade deficit with China would shrink but the trade deficit with a dozen other countries would grow.

Finally, the connection between the trade deficit and jobs is not what many Members of Congress seem to think. The overall U.S. trade deficit was at its highest in 2006, and unemployment was 4.6 percent. In 2009, the deficit was half its former size but unemployment had doubled. The American economy runs on consumers. Consumer spending creates jobs and increases imports, as well as the trade deficit. The trade deficit comes with high employment, not lost jobs.

The final form of the bill is unclear. It could give the Department of Commerce discretion to be selective or be closer to mandatory, across-the-board tariffs. What it will not do is create American jobs. Congress is heading down the wrong path. Again.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/09/23/how-to-cause-another-depression-anyone-anyone/

URLs in this post:

[1] a trade bill: http://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Act

[2] and scheduled to be sent to the House floor next week: http://www.washingtonpost.com/wp-dyn/content/article/2010/09/22/AR2010092206277.html

[3] Each part of this is analysis is wrong: http://www.heritage.org/research/reports/2010/09/targeting-the-yuan-a-feel-good-but-futile-response

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