Replaying the old folly of deregulation
There is no evidence to support Sen. Colin Kenny’s view that higher tariffs resulting from the 1930 SmootHawley Act in the U.S. were a key factor in the Great Depression. Nor is there is evidence that increasing tariffs in general result in harm to the economy (“Replaying the old folly of protectionism,” comment, Feb. 16).
Between 1930 and 1933, the U.S. gross domestic product fell by more than 25 per cent. Doug Irwin’s quantitative assessment of the Smoot-Hawley tariff showed that it had little impact on the decline in GDP (The Review of Economic Statistics of May 1998).
A summary of past research results shows that higher-tariff impacts on the economy are weak and statistically insignificant. There is a tendency to overstate the positive impact of low tariffs on the economy (January 2001 Macroeconomic Annual of the National Bureau of Economic Research, Francisco Rodriguez and Dani Rodrik). Other researchers have shown that high tariffs have resulted in higher economic growth (Kicking Away the Ladder: Development Strategy in Historical Perspective by Ha-Joon Chang, 2002).
Overemphasizing the effect of tariffs could crowd out other factors with potentially greater impact on stable economic growth. The push for deregulation is one example. It assumes that less regulation leads to higher economic growth. This one-sizefits-all approach to deregulation is potentially dangerous.
The 1929 stock market crash and the 2008 world financial crises both occurred as a result of inadequate regulatory oversight. Each crisis was preceded by a lack of transparency, poorly understood “innovative” investment instruments, easy financing that led to overly leveraged investing, unfounded credit ratings and a lack of adequate separation of commercial from investment banking.
In 1934 and 2010, efforts were made to apply new regulations that would prevent further crises. The 1934 Glass-Steagall Act was effective, but over time it was weakened and finally eliminated in 1999. Similarly, the 2010 DoddFrank Act has helped to stabilize financial markets, but is now being subject to possible elimination under the Trump administration’s overly simplistic attack on government regulation. For each new proposed regulation, two existing regulations must be removed.
U.S. President Donald Trump wants to ensure there are zero net costs for new regulations, but only for the private sector. Excluded from the net-zero criteria are the costs to the environment, public health, consumer protection and economic stability, among others.
The Trump administration’s intention to alter the global trading regime is worrisome. A legitimate concern is how increased tariffs or other border measures would affect our exports. But Canada has faced higher U.S. tariffs in the past and has managed to defend itself.
Today there is access to World Trade Organization rules that provide for trade sanctions against the U.S. should it act unilaterally. In addition, U.S. corporations will have a powerful influence on the final decision, and they are the biggest beneficiaries of lower tariffs.
Unfortunately, they believe that less regulation benefits their bottom line. The WTO and NAFTA encourage deregulation with a primary focus on opening markets.
Based on the above research of our economic histories, and on the political power of corporations, tariff increases might cause disruptions in our trade with the U.S., but are very unlikely to result in a world recession. It is far more likely that the unbalanced path to deregulation could result in another global economic meltdown.