Trade Sanctions To Fix The Economy?

I talked the other day about the potential benefits of depreciation in the value of the dollar. But it is wise to bear in mind that there is more than one way to work on staving off the threat of deflation.

William Hawkins of tradealert.org is proposing to raise punitive tariffs instead.

Raising tariffs does achieve the goal of reducing imports. In order to get the US economy kick started, we really need to start getting American consumers to buy American goods instead of imported ones. Depreciation and raising tariffs both work towards that goal.

Tariffs also have the additional benefit of being targeted. Depreciation affects all imports, no matter what they are or where they're from. Tariffs allow the targeting of certain industry segments or the products of certain nations.

So if both paths achieve the same goal and the tariff route affects fewer industries, products or people, why not use punitive tariffs to bring about the economic recovery that we need?

There are really two big reasons why the raising of tariffs is not the proper path: one is political the other is economic.

Politically, the raising of tariffs is a very dangerous thing. Other nations expect a certain level of stability in their dealings with the US. If we raise tariffs, we change the rules of trade midstream with introduces additional risks to trading with us. When a foreign company is unable to ascertain within reason their profits, they will be much more likely to avoid trading with us at all. And we have to remember that the idea is change American spending habits, not to discourage international trade.

Economically, the tariffs smack of a controlled economy. The dollar represents, like shares of a corporation, a degree of ownership in the US economy. And like a corporation, the US economy is subject to various cycles and pressures, some make the economy more valuable; some make it less valuable.

During the last five to ten years we have experienced foreign investors putting money into the US market because the opportunities offered elsewhere weren't all that great. The reward that was being offered overseas wasn't commensurate with the risk. As a result foreign investors were making investments in the US, not because of our strength, but because of weakness elsewhere.

Recently the Euro had depreciated to the point where investment in Europe started to look attractive again. The economies there are stumbling along, but the Euro had become so depreciated that the potential for outsized returns (in relation to dollar denominated investments) began to overcome the inertia of having to unwind positions in the US. As a result, investors having been buying Euro denominated investments, financed by the sale of dollar denominated investments. Hence we see the decline of the dollar and the rise of the Euro.

As the dollar depreciates and more consumers begin buying American goods, the US economy will begin to strengthen at the fundamental level. The combination of a cheap dollar and improving fundamentals will bring foreign investors in search of better returns back into the US capital markets.

Allowing the depreciation mechanism to run its course tends to lead to the economy correcting itself. Using tariffs imposes a correction that may not be supported or justified by the current economic state.

It was tariffs and protectionism, as exemplified by the Hawley-Smoot Tariff Act, which helped to propel us into the Great Depression. At the time the economic situation was not all that dissimilar: the US was coming down off a boom, Japan and the European economies were weak to the point of collapse. Hawley-Smoot really helped to tip the balance in a way that ultimately hurt the American workingman.

Tariffs are not the answer. Beating our trade partners into new, more favorable to us, trade agreements is not the answer. Only a fundamental rebuilding of the US economy is going to get us out of this mess.

Mr. Hawkins likens the imposition of tariffs to stopping the bleeding of the economy.

A Band-Aid doesn't really help on an infected wound. It may stop the bleeding temporarily, but the infection will eventually spread - and could be fatal.

We need to treat the problem, a weak US economy, not the symptom of a weak dollar.