Protectionism refers to government policies that restrict international trade to help domestic industries. Protectionist policies are usually implemented with the goal to improve economic activity within a domestic economy but can also be implemented for safety or quality concerns.
The dumb legislation that made it worse
I remembered reading about the Stock Market Crash of 1929. The causes of it were linked to people buying too many stocks. Local companies overproduced and there was an excess. The stock market became worthless. The solution was rather stupid--protect the domestic industry from imports. Studying history made me not get surprised at this one simple fact--the Great Depression was worsened by protectionism. It was after World War I that it happened. Debts were skyrocketing. It wasn't a good time. The ill-advised solution was protectionism which was done by Reed Smoot and Willis Hawley. Smooth was a devout protectionist who was into sugar beet farming. Smoot was also fighting for high sugar tariffs to protect the sugar beets they were into.
I found this rather interesting excerpt from The Marketplace's article "The American protectionism bill that made the Great Depression worse" regarding the whole frenzy by Smoot:
When bad economics happens to good intentions
So Smoot, along with his House cohort Hawley, began crafting a tariff bill in Washington, which made for very good politics and very bad economics. American farmers in 1929 were struggling, but the problem was not foreign competition; it was depressed agriculture prices. Tariffs would not solve this, yet farmers still wanted relief. And politicians still wanted to help — or appear to be helping.
“They had a lot of debt as a result of World War I,” author Irwin said. “Crop prices were lower after the war, and they tried initially to help farmers through price supports. But that was considered a new idea. So they came to the tariff as sort of an indirect way of helping out farmers by stopping imports of farm goods.”
The Republican party at the time controlled both chambers of Congress and the White House, and was concerned about winning the Midwestern farm vote in the next election.
“I think it was more of a signaling thing,” Irwin said. “They didn’t think it was going to be a big deal when they proposed it.”
But it turned into a big deal, a protectionist feeding frenzy, in fact. Congress started holding hearings on tariffs in 1929, at which point all kinds of lobbyist and industry groups showed up to piggyback on the farm tariffs. Ball bearings, steel, textiles, shoes, bricks, collapsible tubs, bottle caps, sprinkler tops, you name it. Even the goldfish industry joined the protectionist exuberance.
The bill was signed at all the wrong timings--during the Great Depression and a year after the Stock Market Crash of 1929. I'm really not even surprised reading these words from Marketplace which I'll share an excerpt from :
These kind of trade walls went up all across Europe as well, affecting all manner of U.S. producers. This confirmed what some call the Golden Rule of Protectionism: Tariff unto others as you would have others tariff unto you.
“It’s not just tariffs are harmful for the world economy,” Irwin said. “It’s that they really breed ill will among nations.”
So, what exactly was the damage from Smoot and Hawley’s big adventure?
The answer is, it’s complicated. Economists pretty much agree now that Smoot and Hawley’s handiwork didn’t tip us into the Depression. We were in the soup already by 1930. But it certainly didn’t relieve unemployment, like protectionists promised. And it probably helped deepen the Depression since it shattered world trade.
“The general contraction of trade led by trade barriers did harm the world economy and probably made the Great Depression worse,” Irwin said.
How I understand this one is pretty much like the golden rule. In Christianity, you are told to do unto others what you don't want others to do unto you. The golden rule is uttered in the negative sense such as when Confucius also said (among others before and after him), "Don't do unto others what you don't want others to do unto you." This was the big issue of unreasonable tariffs for imported goods. Besides, one can see that Smoot's laws were self-serving. The Mormon group was into sugar beet farming. Smoot was more after his own interests to protect the sugar beets his group was investing in. This is a very interesting fact about Smoot's personal interests according to Kuer 90.1:
Smoot’s interest in tariffs was personal, too. The Church of Jesus Christ of Latter-day Saints was heavily invested in the sugar industry — with Mormon farmers growing sugar beets across the Intermountain West, Heath said. When cheaper imported sugar started coming from Cuba and other island nations, Smoot moved to stabilize prices for Utah’s farmers.
“So he was always aware of the need to keep tariffs high to protect his constituency back home,” Heath said. “And he got a reputation for liking tariffs.”
But by the time Smoot and his House counterpart, Oregon Rep. Willis Hawley, got their bill signed into law in 1930, the stock market had already crashed and the country was in dire economic straits. What was intended to help save agriculture jobs only ended up hurting them.
“Once the Depression started, as prices began to fall, what that meant was that those taxes became a higher percentage of a price of that good,” Maloney, the University of Utah economics professor, said.
This was truly a suicidal move. Smoot could've thought of the opportunity of sugar beets instead of looking at sugar from Cuba (which also became protectionist) as well as other island nations as a threat to learn from instead. Smoot decided to take the "easy way out" which had really bad consequences. Smoot could've thought of exporting the sugar beets or innovating. The easy way out only babied the agriculture industry. Even worse, other nations gave tariffs on American products which became a chain of events that made it worldwide. Protectionism is very contagious whether want to admit it or not!
The National Bureau of Economic Research wrote last 2009 also says this concerning protectionism based on the gold standard:
In a more detailed analysis of changes in tariffs and exchange rates for a group of 21 mostly European nations and a larger sample of 40 countries between 1928 and 1935, the authors find the same trend: those that abandoned the gold standard were less likely to increase import tariffs. There is fair bit of variation from the average, though, partly because of certain national idiosyncrasies (such as Britain's internal political dynamics), partly because of additional factors across countries (such as whether they were international financial centers or had recently experienced high inflation). Either of these latter factors would have made a nation more reluctant to abandon the gold standard, the authors argue. Indeed, when they control for these factors, the results reinforce the conclusion that there is a strong relationship between the change in the exchange rate and the change in import tariffs.
Remaining on the gold standard fueled protectionism, but the countries that left the gold standard began to liberalize their trade policies. The United States, for example, delinked in 1933 and a year later enacted the Reciprocal Trade Agreements Act, which gave the President the authority to trim import duties in foreign-trade agreements. Once France went off gold in 1936, it began eliminating import quotas.
Parallels between the Great Depression and today have raised fears of a new slide toward protectionism. But the policy tools in the modern era are different, the authors write. In the 1930s, stimulus meant monetary stimulus, which tended to depreciate the nation's currency and make its products cheaper in export markets. Such moves tempted other nations to impose trade barriers. Today, besides monetary stimulus, nations are using fiscal stimulus that boosts domestic demand and helps not only the nation that uses it but also those countries that export to it. Thus, the temptation to restrict imports now rests with nations enacting such stimulus. The "Buy America" provisions in the 2009 U.S. federal stimulus package are one example.
In short, the U.S. had abandoned the useless gold standard. It was really something good that they did by removing those protectionist measures. The stimulus is defined by Investopedia as follows:
A stimulus package is a package of economic measures a government invokes to stimulate a floundering economy. The objective of a stimulus package is to reinvigorate the economy and prevent or reverse a recession by boosting employment and spending.
The theory behind the usefulness of a stimulus package is rooted in Keynesian economics, which argues that recessions are not self-correcting; therefore, government intervention can lessen the impact of a recession. For example, a stimulus, or increased government spending, can compensate for decreased private spending, thereby boosting aggregate demand and closing the output gap in the economy.
This would also involve the following:
- Monetary stimulus means cutting off interest rates for the meantime.
- Fiscal stimulus means temporarily reducing taxes to get more spending power from the people or increasing government spending.
- Quantitative easing is purchasing a large number of financial assets, such as bonds, from commercial banks and other financial institutions)
The heavy lesson for any country that engages in protectionism
Pages 57-58
After several years of disheartening trial and error, we concluded that Singapore's best hope lay with the American multinational corporations (MNCs). When the Taiwanese and Hong Kong entrepreneurs came in the 1960s, they brought low technology such as textile and toy manufacturing, labor-intensive but not large-scale. American MNCs brought higher technology in large-scale operations, creating many jobs. They had weight and confidence. They believed that their government was going to stay in Southeast Asia and their businesses were safe from confiscation or war loss.
I gradually crystallized my thoughts and settled on a two-pronged strategy to overcome our disadvantages. The first was to leapfrog the region, as the Israelis had done. This idea sprang from a discussion I had with a UNDP expert who visited Singapore in 1962. In 1964, while on a tour of Africa, I met him again in Malawi. He described to me how the Israelis, faced with a more hostile environment than ours, had found a way around their difficulties by leaping over their Arab neighbors who boycotted them, to trade with Europe and America. Since our neighbors were out to reduce their ties with us, we had to link up with the developed world-America, Europe, and Japan-and attract their manufacturers to produce in Singapore and export their products to the developed countries.The accepted wisdom of development economists at the time was that MNCs were exploiters of cheap land, labor, and raw materials. This "dependency school" of economists argued that MNCs continued the colonial pattern of exploitation that left the developing countries selling raw materials to and buying consumer goods from the advanced countries. MNCs controlled technology and consumer preferences and formed alliances with their host governments to exploit the people and keep them down. Third World leaders believed this theory of neocolonialist exploitation, but Keng Swee and I were not impressed. We had a real-life problem to solve and could not afford to be conscribed by any theory or dogma. Anyway, Singapore had no natural resources for MNCs to exploit. All it had were hard-working people, good basic infrastructure, and a government that was determined to be honest and competent. Our duty was to create a livelihood for 2 million Singaporeans. If MNCs could give our workers employment and teach them technical and engineering skills and management know-how, we should bring in the MNCs."
Page 66
Our job was to plan the broad economic objectives and the target periods within which to achieve them. We reviewed these plans regularly and adjusted them as new realities changed the outlook. Infrastructure and the training and education of workers to meet the needs of employers had to be planned years in advance. We did not have a group of ready made entrepreneurs such as Hong Kong gained in the Chinese industrialists and bankers who came fleeing from Shanghai, Canton, and other cities when the communists took over. Had we waited for our traders to learn to be industrialists we would have starved. It is absurd for critics to suggest in the 1990s that had we grown our own entrepreneurs, we would have been less at the mercy of the rootless MNCs. Even with the experienced talent Hong Kong received in Chinese refugees, its manufacturing technology level is not in the same class as that of the MNCs in Singapore.
The balance of everything is based on supply and demand. World trade itself would help get rid of excess supply in your country and fill in the scarcity of supply in your country. Would it matter if your supplies are local or imported? In Deng Xiaoping's case, he didn't care if the cat was black or white, as long as it caught mice. Deng's powerful economic reforms can't be underestimated when it brought China from the slump caused by Mao Zedong. Deng caused a real great leap forward by opening up China to foreign investment. Deng learned from Lee in that regard and also created another economic miracle for a country destroyed by Mao's inept economic policies.
The effects of global trade are good. The aim of foreign direct investors (FDI) is all about investment and not imperialism or invasion. Allowing FDIs in the form of multinational corporations (MNCs) to invest with 100% shares ownership is beneficial. They get to keep their net profits after taxes, so what? Net profits only happen when an MNC is able to pay all its bills and taxes. The MNC can continue to earn a profit provided that they pay their suppliers, they pay their lessors, and they pay government fees which include taxes. The MNCs get rich but the Bureau of Internal Revenue will collect their taxes whether it's Value Added Tax (VAT), withholding tax, quarterly tax, and the annual income tax. The conditions to do business are pretty much like the lessor-lessee relationship. The lessor collects rentals every month and it's good news if the lessee gets rich investing in that area. The lessee can continue to do business in that area as long as he or she follows rules. MNCs can continue to get rich in that area as long as they follow rules. What's the whole point again in whining about MNCs when there are still rules for them to follow?
Right now, the Philippines' signing of the Public Service Act of 2022 will change the scales. Inviting more FDIs in the Philippines can help recover from various debts accumulated throughout the years. It's natural that a country must borrow money when needed. However, it must also have the ability to pay that money back. The Great Depression was a worldwide debt cycle. Free markets will create money to make sure that the debt-equity ratio isn't at a dangerous level.
References
Books
Websites
https://factsanddetails.com/china/cat2/sub7/item79.html
https://www.china-mike.com/chinese-history-timeline/part-15-deng-xiaoping/