Playing With Fire

A bad recession in the early 1930′s turned into the Great Depression largely because politicians did what they are wont to do. Legislate badly. We may be staring down the barrel of that gun once more.

A short article in the New York Times this evening which deserves to be much longer points out that relations between China and the U.S. are deteriorating and the governing class has plans to dump some gasoline on the fire.

Specifically, business, unions and lawmakers are getting ready fo force the Obama administration to walk a hard line with the Chinese on their currency value and trade policies. Recall, that Obama ran a campaign that was just a step away from outright protectionism. He hewed to the conventional wisdom that if we could just bring the Chinese, Mexicans, Canadians and assorted other villains to heel then our balance of trade problems would be cured. Now those campaign chits are being called in at the worst of all possible times.

The head of the Senate Finance Committee, Max Baucus, Democrat of Montana, plans legislation to raise tariffs on dumped imports from China and elsewhere. And new Democratic congressmen like Larry Kissell of North Carolina and Dan Maffei of New York have pledged actions to stop jobs from being shipped to China.

China’s exports declined in November for the first time in seven years, and economic growth may slow by more than half to as little as 5 percent in 2009, according to the Royal Bank of Scotland. That has prompted China’s leaders to increase tax rebates on thousands of exported products; meanwhile, the yuan’s steady rise against the dollar stalled in July, and the currency has barely budged since.

American companies are preparing trade complaints that could lead to increased tariffs. Lawyers representing companies like Nucor, a large steel maker, NewPage, a maker of coated paper, and smaller textile and steel pipe makers say they are considering new trade complaints against China. Policies in both countries are shaped by the need to cope with steep falls in employment.

If this doesn’t resonate with you, it should. One of the roots of the Great Depression was the collapse of world trade brought about by protective tariffs. The lesson, which no one has ever disputed, is that if ever again faced with a similar situation, cooperation and concession must be the order of the day. Now faced with a similar situation, we seem to be in danger of repeating the same mistakes.

Before this spins out of control, Summers, Geithner and even Obama have got to make it clear that no good will come from protectionism at this point in time. That means whipping the Congressional Democrats into line. There will be a time and place at which to address these issues. Now is neither.

If you read this blog much, you know that I consider the current problems as they exist within this country fixable. I may disagree with the methods but I believe we can muddle through without too much damage. At the same time, I fear that events outside this country could run completely out of control and destroy our ability to manage the issues. If we contribute to that sort of instability then we may well deserve the fate we create.

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