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Tariffs Will Make the Global Economic Collapse Much Worse: Part 1

By: Steve Johnson

3/25/2010 - 55 Comments

A growing number of politicians and economists are calling for an increase in trade tariffs, to reign in the unfair monetary policies and currency manipulations of other nations – namely China.

To set the stage for this idea, let me start by saying the economy is not recovering anywhere in the world, and instead of what you may have read the global economic collapse is just getting started.

That said; I don’t think tariffs are the solution to the present economic crisis – although there is a lot of evidence that points to the reduction of tariffs as a major contributor to the global economy crisis.

A few years ago I wrote about tariffs in an article series called ‘The Rise of the Global Economy’, in which I said that the reduction in tariffs over the last 60 years has drastically decreased the prices of goods all over the world – and therefore has been the primary source of global economic growth for the last century.

Trade agreements have brought financial benefits to many nations.  But most of the money gained has been spent – primarily by expanding government entitlement programs and consumer spending.

The reduction in tariffs was exchanged for tightly coupling the economies of sovereign nations with debt and credit.  So each trade deal like NAFTA allowed a poorer nation to import their products into richer nations in exchange for them to borrow more money at lower interest rates. 

The result was that easy money or cheap money was made more available to poorer nations in exchange for these nations to put more people to work, while at the same time rich nations like the U.S. lost millions of jobs primarily in the manufacturing sector and enjoyed the benefits of an increase in standard of living made available by lower prices of goods.

Now after decades of enjoying an increase in standard of living, the politicians are upset about the job loses – that they signed away. 

Are Trade Agreements Good or Bad

Free trade agreements caused millions of jobs to shift from one nation to another.  But without these jobs, rich nations would either have to continue to provide direct aid to poor nations or poor nations would need to create or improve their own local economies. 

This is where I struggle.  As a free-market economist, I’m always in support of lower prices for the consumer, which trade agreements bring.  Trade agreements also allow more people to benefit from the labor of workers from other nations.  The foundation of capitalism is based on free labor and consumer choices.

At the same time, trade agreements export jobs, create consumer dependence on foreign nations and increase the trade deficit.  As I write this article, I feel like I’m talking myself into support for tariffs. 

The Money Is Gone

The big problem that cannot be quickly undone is that the money that was gained by the expansion of the global economy is gone – spent on new homes, cars and tons of government programs around the world. 

Both rich nations and the poor nations didn’t save the money they gained by the expanded trade agreements of the last hundred years.  They borrowed and spent every dime they could.

So here we are at the end of a great global economic expansion, facing the largest global debt crisis in history, without the ability to produce wealth because we lost our manufacturing sector and our government is choking the rest of our economy with increases in taxes and regulations, while producer nations are starving because of the drop in economic growth.

On top of that, the major economies of the world are tightly coupled together so that if one fails – they all fail. 

The biggest risk is not that one nation fails, which many are on the verge of, but because they are all so interdependent – that any nation could collapse the entire global economy.

For this reason, the politicians are saying – raise the tariffs, decouple the economies before we all go down with the ship.

But I don’t think we can quickly untie our boat from the ship because we are the ship.  We cannot afford the price increases that would result from an increase in tariffs because we are already deeply in debt, nor can any other nation.  

Although, if an increase in tariffs would cause the U.S. to face the facts and drastically cut government spending, then perhaps it’s the best thing to do.

It would take another 50 years to undo the global trade expansion that we have just lived through and it would result is a drastic drop in the standard of living in almost every nation, leading to an even bigger crisis as millions would starve to death. 

Who would vote for that?

Even if politicians were able to increase tariffs to temporarily protect U.S. jobs, the result will lead to bankrupting the companies with the jobs they are protecting, as consumers reduce their spending from the increase in costs of products their companies are producing. 

Obama’s protectionism policies to protect union jobs will result in the collapse of the unions or if Obama decides to continue printing money to support these companies (auto, housing, finance) and many government departments (defense, education, security, healthcare, etc.) that are operating at a loss, it will result in a collapse of the dollar.

The economy is in deep trouble and tariffs are not going to be able to help fast enough, without causing more job losses and wage reductions.  Tariffs cannot save the U.S. from defaulting. 

In part 2, I’m going to continue this discussion on tariffs. It seems like I cannot write anything anymore in one article.

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