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American Foreign Trade Policy

Lessons from the Past
This past year, critics of government economic policy have argued that not enough was being
done to create new jobs and increase the number of working Americans. Moreover, increasingly
one could hear the rumblings of a new protectionist movement emerging among the various
segments of our society.

A new trade war, through the erection of a wall of tariffs and quotas to shield American industry
and workers from foreign competition,  was often viewed as the answer to our unemployment problem.
What seems to be poorly understood is that any protectionist measures, undertaking by the United
States, would likely result in even fewer jobs and higher unemployment than exist today. In the
extreme case, it may even mean the destruction of wealth mirroring the crash of the stock market in 1929
and a severe economic downturn.

Retaliatory actions on the part of our foreign trading partners would be almost immediate.
American jobs associated with the exports of agricultural goods, aircraft, computers and other
high tech products would be sharply reduced or simply vanish. It has been estimated that today
some 30 million American jobs depend on the exports of domestically produced goods and
services to other countries.  They would all be at risk. The spill over effects from such losses
would further exacerbate an already disastrous outcome.

A brief History

In the United States,  protectionist movements are not new. One such movement began to rear its
ugly head in the 1890s. Except for a brief period in 1913, it continued its destructive path all the
way up through 1930.  The Smoot-Hawley tariff passed by Congress in 1930, which imposed
import taxes of up to 60% on certain manufactured goods, was the culmination of this movement.
Some analysts have argued that because the debate in Congress raged well before the crash of the
stock market in October 1929, Smoot-Hawley was a major contributing factor in its collapse and
the subsequent economic calamity known as the great depression. This severe downturn of the
US economy was not really resolved until World War II.

At the height of the great depression the unemployment rate reached 24.9%. Despite
President Roosevelt's New Deal policies and the various measures that were implemented to
stimulate the economy, at beginning of W.W.II in 1939, the unemployment rate was still around
17%. Clearly, several factors contributed to the great depression, including an inept central bank
policy and the collapse of the banking system, but our foreign trade policy played an important
role.

Fortunately, the lessons learnt in the 1930s set the stage for a change in US policy after World
War II, when a more friendly foreign trade policy emerged.  In 1944, even before hostilities in
Europe had ended, the United States and her allies assembled in Bretton Woods, New Hampshire
to forge a new world trading and financial system. A system that would aid in the reconstruction
of Western Europe and Japan and foster the liberalization and expansion of World trade. The
unprecedented postwar prosperity experienced, by most nations, across the globe is largely due to
American trade policy that started in 1944 and has been followed since.


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