Another great post from Michael Pettis

In the 1920s, the U.S. exported heavily into Europe and it devalued its currency to aid the British economy. The weak U.S. dollar fueled exports to Europe, but they could not export back to the U.S. due to tariffs and financed their purchases with loans from U.S. banks. When the global economy ground to a halt, Europeans needed to obtain dollars to pay off their loans, but credit was hard to come by. Their other option was exporting to the U.S., but Smoot-Hawley killed that possibility. The global economy was hit hard and the U.S. suffered greatly due to having most of the overcapacity, as well as the misguided intervention of Hoover and then FDR. In fact, it might be said that the U.S. helped Europe out of the Depression because the retaliatory tariffs killed global trade and boosted their domestic production. Thus, the passage of the Smoot-Hawley tariff was completely wrongheaded.

China understands it is in the position of the U.S. in 1930, but Pettis argues their actions are not making the jobs of free traders in the U.S. and Europe any easier, and the U.S. and E.U. politicians know that they are in a position to bring jobs home through tariffs. As they economy worsens and jobs become more valuable, the pressure to stifle imports will grow.

Can Smoot-Hawley only happen in the US?

I think, in fact, that a nasty fight over trade is very probable and I worry that not only will trade conflict come as a huge shock to China’s economy, but also that Chinese actions and public statements are actually contributing more to that probability than all the buy-America, buy-Europe talk filling the air.

Actions such as the investment in rail capacity I posted a few minutes ago.
Read the whole thing.

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