Copyright by John T. Reed
The January, 2009 “stimulus” bill contains “Buy American” laws designed to create more jobs in the U.S.
Here is what the Toronto Star said about it:
A "Buy American" rider in the U.S. economic stimulus package that would block the use of foreign-made iron, steel, textiles and manufactured products is triggering a wave of alarm in Canada and around the world.
The headline on the 2/6/09 Wall Street Journal was “Nations rush to establish new barriers to trade.” The cover of the 2/7/09 The Economist magazine has the headline “The Return of Economic Nationalism” and a photo of a dead body clawed hand bursting up out of a graveyard with gravestones labeled “The Great Depression” “‘Over my dead body’ Here lies protectionism” and “R. Smoot and W.G. Hawley” with the additional caption “Hardly missed” on that one.
The American people and their leaders were too ignorant of economics in the 1930s to avoid this mistake and they are too ignorant to avoid repeating it now. I normally get intelligent emails in response my headline news articles. With this one, I also get the typical ignorant-of-economics support for protectionism. Q.E.D.
Obama’s “stimulus” package is beside the point, except that by containing “Buy American” provisions, it helped to foment this trade war. His anti-NAFTA and other anti-trade comments during the primaries also helped trigger this disaster. Obama famously told a Republican Congressman, “I won. I trump you on that” about some policy debate. Well, guess what affirmative-action guy. An international trade war trumps you, your “stimulus” bill, your “control” of Congress, your supporters, your war chest of leftover campaign contributions, your email list, your ability to read teleprompters, and the entire budget of the U.S. government.
The total international trade of just the U.S. was about $3 trillion in 2006, the most recent year I found figures for. The projected total U.S. government spending for everything in 2009 is also about $3 trillion. In the Great Depression, international trade dropped 66%. A drop in international trade would hurt worse today. For example, if the U.S. banned its citizens from buying foreign cars or cars made with foreign parts in 1932, the American people would have said, “Who cares? We’ve never bought such cars anyway except for a few rich people bringing Rolls Royces over on ships.”
Today, a ban on buying foreign cars or cars containing foreign parts would force everyone to drive classic U.S. cars built in the 1960s or before. The same is true of appliances, clothing, most agricultural products, and so forth. We are now totally dependent on foreign trade for products and parts today in almost every aspect of the economy. To put it another way, by prohibiting buying a $100 foreign part, we will stop the sale of a U.S. $2,000 computer. In other words, the drop in foreign trade caused by the trade war will be multiplied by the sale prices of bigger products that have one or more foreign parts.
In many cases, there is no domestic source for the part in question. For example, I believe there have not been any U.S. TV manufacturers for years. Same with small airplanes and many other products. Even where there are U.S. sources, they cannot overnight produce enough products to replace the quantities foreign manufacturers were producing. Furthermore, they themselves may be shut down by inability to import component parts that they use. At the most basic level, we need many commodities, like oil or metals, that do not exist in the U.S. in sufficient quantities or which cannot be extracted from U.S. soil because of environmental restrictions
We are also dependent more on China than any other country for borrowing the money to pay for the “stimulus” package and other deficit spending. China has become our biggest creditor, that is, the biggest buyer and owner of U.S. government bonds. U.S. protectionism is mainly aimed at Chinese products. It seems likely that China will retaliate by stopping the purchase of U.S. government bonds and my sell the ones they own. Ouch! Unless some foreign country buys about a trillion dollars worth of U.S. bonds, there will be no “stimulus” spending regardless of how Congress voted and what Obama signed.
International trade war is each country enacting tariffs and other restrictions on imports. In other words, they make it essentially illegal for U.S. companies to sell products to their country. If it is illegal for U.S. companies to sell their products and services to foreign countries, we will sell a lot less stuff to foreign countries. That will cause a depression. This is not some complex, macroeconomic forecast. It’s a quite linear, short, chain of events. Outlawing international trade reduces foreign trade.
Obama said he’s going to create four million jobs. Actually, the Congressional Budget Office said his “stimulus” will create maybe 1.3 million jobs. I do not know if they commented about whether those jobs will last longer than it takes to build a frisbee golf course and other stuff that is in the bill. But his protectionism will probably cost America about 15 million jobs as our companies get retaliated against by countries around the world. His increased government spending will increase government borrowing which will increase interest rates and cost other American their jobs.
There will now be a depression and Obama will, properly, get blamed for it, by the people who study such things rigorously. Of course, his political supporters never examine anything rigorously, by definition, so they will blame Bush. (Actually, the liberal San Francisco Chronicle supported Obama but even they editorialized strongly against protectionism.)
In a CNBC interview Vice-President Joe Biden said of the "Buy America" steel provision in the “stimulus” bill, "I don't view that as some of the pure free traders view it, as a harbinger of protectionism. I don't buy that at all. I think it's legitimate to have some portions of buy American in it. I don't think there's anything anti-competitive or antitrade in saying when we are stimulating the US economy that the purpose is to create US jobs," he said. "The same thing's happening in Britain, the same thing's happening in Europe, the same thing's happening in China, and they're not worrying about American jobs."
This is precisely the way all trade war instigators talk.
1. Such laws violate treaties we previously signed like NAFTA and GATT.
2. Such laws will break the dam of an international trade war which began last fall.
The original Great Depression happened and lasted as long as it did not because of the stock market crash as most think. It happened mostly because of the Smoot-Hawley Tariff Act which was passed during the Hoover Administration in response to the 1929 stock market crash and which was continued and extended by FDR.
Every country on earth that will be adversely affected by our new “Buy American” law will retaliate against us by adopting their own “Buy Canadian,” “Buy Chinese,” and so forth laws. International trade, which is far more important in 2009 than it was in 1929, will plummet as it did in the 1930s. A “Buy American” law is also a “Sell American” law because of certain retaliation by other countries to not being able to sell their products here.
It fell 66% back then. But such a fall would hurt far more now because nations are far more interdependent now. A U.S. law banning the purchase of foreign-made cars or cars containing foreign-made parts would shut down the U.S. auto industry for years as they scrambled for years to create new U.S. companies that could produce the parts now supplied by foreign companies. Furthermore, the cars that emerged would be far more expensive and of significantly lower quality than today’s cars. Just what we need in a depression.
A high percentage of Americans involved in international trade, e.g., sales clerks at J.C. Penney's, will lose their jobs. Almost every American who produces good for export will be laid off or suffer a dramatic diminution in income. Those involved with international tourism and business like international airlines will get laid off. Hotels that rent rooms to foreigners in the U.S. and other countries will suffer dramatic declines. And that’s just a partial list.
A few unions in the U.S. will do better as a result of the “Buy American” laws. The union are the ones behind this. The vast majority of Americans will suffer greatly from the ensuing Depression.
Taken literally, “Buy American” means no bananas at all because there are no American bananas. It also means gasoline will go to $25 a gallon or some such because we will no longer be able to buy Canadian, Mexican, Arabian, or any other kind of oil than from U.S. wells. There are far too few U.S. oil wells to meet U.S. demand.
I do not make economic predictions as a general rule. I do not call market bottoms or tops. But this is different. The Democrats are about to outlaw international trade worldwide, directly by currently proposed and similar future law and indirectly through retaliation against us by other countries. If they outlaw international trade and trigger a trade war that causes other countries to do the same to us, there will be less international trade.
We will see it within months.
It will take generations to undo the resulting anti-international trade mess, as it took generations to not-yet-totally clean up the Smoot-Hawley-triggered 1930s trade wars.
I appreciate informed, well-thought-out constructive criticism and suggestions. If there are any errors or omissions in my facts or logic, please tell me about them. If you are correct, I will fix the item in question. If you wish, I will give you credit. Where appropriate, I will apologize for the error. To date, I have been surprised at how few such corrections I have had to make.