Mercantilism, Tariffs, and the Great Depression

Barthélemy de Laffemas was a French thinker and economist. In 1598, there were many in France who opposed the trade of expensive silks. Laffemas argued that purchasers of luxury goods created a livelihood for the poor. Laffemas was an atypical mercantilist who also advised the king not to directly prohibit the export of gold. This was a break with many other mercantilists, who wanted to restrict gold bullion from leaving France, but in turn, caused a severe reduction of gold coming in.

Mercantilism is a protectionist posture most often led by governments, in which trade generates wealth and is stimulated by the accumulation of profitable balances. In assessing mercantilism, C.W. London said it “dominated European thought between the 16th and 18th centuries, is now considered no more than a historical artifact — and no self-respecting economist would describe themselves as mercantilist. The dispatching of mercantilist doctrine is one of the foundation stones of modern economics.” In part, that is because it revolved around having larger bullion reserves than other nation-states.

As monetary policy moved from the gold standard to fiat money, central banks did not depend on stores of gold to stimulate economies when there was a recession or depression. Mercantilist thinkers remained, but were concerned with maximizing employment.

The most common tools at the disposal of protectionist or mercantilist forces are tariffs, duties, excise taxes, levies, or other assessments.

In 1929, the United States stock market crashed and Herbert Hoover wrote to a governor that he wanted to "get machinery of the country into action." President Hoover’s philosophy was to refrain from government intervention in manipulating the value of the currency, forcing fixed prices, or controlling businesses. Yet, less than a year after the stock market crashed, Herbert Hoover signed Smoot-Hawley Tariff Act, which substantially raised U.S. tariffs on 890 products.

Trading partners retaliated. By 1932, hundreds of thousands were homeless in the U.S. and unemployment rate increased 600% in the U.S., while unemployment in Great Britain rose some 130% and over 200% in France and Germany. World trade dropped 66 percent from the 1929 level by the end of 1934.

More than 5000 banks had failed, Milton Friedman noted that the money supply contracted by one-third between 1929 and 1933. The economist pointed out that many

companies couldn’t finance their operations or growth, making it impossible to make capital investments or hire people. American exports fell from $5.2 billion to $1.7 billion from 1929 to 1933. Cotton, wheat, and tobacco output was disproportionately impacted. As a result, many farmers defaulted on their loans in the U.S., which in turn destroyed many small rural banks.

To avert the crisis, 1,028 leading American economists presented the President and authors of the bill with a letter arguing that the tariff increases would raise the cost of living. They sent the letter less than two months before Hoover signed the Act into law. The economists predicted accurately that that tariffs would limit exports from the U.S. to other countries as trading partners retaliated. The economists predicted that tariffs would harm U.S. investors and financial institutions, since the high tariffs would make it harder for foreign debtors to repay their loans.

The economists had historic data to support their assertions. The U.S. had already experimented with protectionism in the 18th and 19th Centuries. However, the western expansion across the North American continent offset some of the impact. 20 million immigrants came to the U.S. in the 19th Century. And economic growth was stimulated by construction of infrastructure, mining, transportation, and farming. In effect, the U.S was a giant, continental-size free-trade zone.

The lessons from the Great Depression were learned by many of today's economists in college. As a result, the levels of tariffs have dropped significantly since the mid-20th Century. As a result, global domestic product (GDP) has grown measurably, while a growing percentage of that increase can be attributed to free trade with low tariff levels.

At the same time, there are many non-economists who see interactions between economies as a "zero sum game." Merriam-Webster defines this as "being a situation (such as a game or relationship) in which a gain for one side entails a corresponding loss for the other side." Many of those who advocate for protectionism harken back to mercantilism on the 16th through 18th Centuries. Yet, there is some reason to pay close attention to trade statistics.

China has a taken a disproportionate share of the U.S. trade deficit, in comparison to the next three closest trading partners, Japan, Germany, and Mexico. The U.S. Trade Representative reports the top import categories were: electrical machinery ($129 billion), machinery ($97 billion), furniture and bedding ($29 billion), toys and sports equipment ($24 billion) and footwear ($15 billion) in in 2016, while U.S. imports of agricultural products from China totaled $4.3 billion in 2016. Top export categories were aircraft ($15 billion), electrical machinery ($12 billion), machinery ($11 billion) and vehicles ($11 billion) miscellaneous grain, seeds, fruit (i.e., soybeans) ($15 billion) in 2016. U.S. exports of agricultural products to China totaled $21 billion in 2016.

Yingfluence believes that free trade is good, and must offer a win-win to both partners — countries, companies, and professionals.

Sources:

https://www.economist.com/free-exchange/2013/08/23/what-was-mercantilism

https://mises.org/library/barth%C3%A9lemy-de-laffemas-first-major-french-mercantilist

https://www.gilderlehrman.org/content/herbert-hoover-great-depression-and-new-deal-1931%E2%80%931933

https://www.cato.org/publications/commentary/truth-about-trade-history

http://www.eastspring.com/perspectives/trade-and-tariffs-lessons-from-history

https://www.wto.org/english/res_e/statis_e/statis_e.htm

https://qz.com/1230399/a-history-of-tariffs-us-protectionism-in-one-230-year-chart/

http://americastradepolicy.com/did-the-smoot-hawley-tariff-cause-the-great-depression/#.WxRBn1MvzEY

https://www.merriam-webster.com/dictionary/zero-sum%20game

https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china