The last President to initiate a trade war during a recession wound up creating the biggest economic catastrophe in American history. Yet the current President appears to have ignored the lesson of Herbert Hoover and the Smoot-Hawley Act in slapping tariffs on China and its tire exports while the economy struggles to come back to life after a deep recession. The Wall Street Journal wonders where Barack Obama is leading the US, or whether Obama wants to lead at all:
The smell of trade war is suddenly in the air. Mr. Obama slapped a 35% tariff on Chinese tires Friday night, and China responded on the weekend by threatening to retaliate against U.S. chickens and auto parts. That followed French President Nicolas Sarkozy’s demand on Thursday that Europe impose a carbon tariff on imports from countries that don’t follow its cap-and-trade diktats. “We need to impose a carbon tax at [Europe’s] border. I will lead that battle,” he said.
Mr. Sarkozy was following U.S. Energy Secretary Steven Chu, who has endorsed a carbon tax on imports, and the U.S. House of Representatives, which passed a carbon tariff as part of its cap-and-tax bill. This in turn followed the “Buy American” provisions of the stimulus, which has incensed much of Canada; Congress’s bill to ban Mexican trucks from U.S. roads in direct violation of Nafta, prompting Mexico to retaliate against U.S. farm and kitchen goods; and the must-make-cars-in-America provisions of the auto bailouts. Meanwhile, U.S. trade pacts with Colombia, Panama and South Korea languish in Congress.
Through all of this Mr. Obama has either said nothing or objected so feebly that Congress has assumed he doesn’t mean it. Despite his pro-forma demurrals, Mr. Obama’s actions and nonactions are telling the world that the U.S. is abandoning the global leadership on trade that Presidents of both parties have worked to maintain since the 1930s. His advisers whisper that their man is merely playing a little tactical domestic politics, but he is playing with fire, as the last 80 years of trade history should tell him.
Not only does this ignore the history of trade wars and recessions, which the Journal outlines, but it also ignores Obama’s own big-spending policies. Obama wants to spend trillions of dollars in deficits over the next ten years, especially on his overhaul of the health-care and energy industries in the US. That will take a lot of happy bondholders buying US debt, and for the last several years, that means China. What happens when China stops buying — or worse yet, starts selling what Treasuries they already hold?
If an American administration wanted to confront China on trade, it should have prepared itself by eliminating the need to sell debt. That administration would have pared down spending dramatically, lowered corporate taxes to allow for better competition in the global marketplace for American companies, and encouraged domestic investment by lowering capital-gains taxes. The Obama administration has done the exact opposite instead, leaving the US completely unprepared for a trade war against China, especially over tires, which impacts a mere 7,000 jobs in the US.
Bill Clinton, for all his faults, understood the power and the necessity of open trade. George Bush learned that lesson after a fumble on steel tariffs in 2001. No other president since Hoover has made the mistake of thinking that a trade war would help bolster the economy here in the US or abroad. Picking a fight with the US’s largest debtholder as we prepare to issue more debt in the next few years than we have over the course of the past 230 seems like a foolish, ignorant strategy — the worst of both worlds, with the worst possible outcomes.