Protectionism is an economic disaster waiting to happen

On Friday, the Bush administration announced its decision to impose duties on imports of coated paper from China. At the same time, there’s bipartisan support in Congress to impose tariffs on Chinese goods unless China allows its currency to appreciate against the dollar more quickly.

Let me quickly quote Santayana, “Those who cannot remember the past are condemned to repeat it.”

One of the leading causes of the Great Depression was the Smoot Hawley Tariff Act, signed into law on June 17, 1930. This act raised tariffs on 20,000 imported goods and led to a trade war as many countries retaliated by raising tariffs on American goods. The result: American exports and imports plunged by more than half.

Am I saying that these actions will lead to another depression? Not necessarily, but it’s a dangerous step in that direction.

If the President, Congress and anti-globalization-types get their way, what would be the result? Chinese currency increasing would probably lead to a higher inflation, higher interest rates, an increase in the cost of goods for most Americans, and maybe a slight, temporary increase in exports.

Higher inflation would mean increased costs for Americans which would further squeeze their already indebted lifestyles. It would also lead to higher interest rates as lenders and bond purchasers demanded higher rates to deal with inflation.

Higher interest rates could lead to dangerous consequences in the housing market as those unable to pay their floating rate mortgages or refinance would have to punt their homes back to their lenders. Higher interest rates would also lead to lower asset prices for stocks, bonds and real estate as investors would insist on higher returns to make up for losses due to inflation.

Higher costs would decrease discretionary income for consumers, leading to higher unemployment and more loan defaults. This could cause a negative spiral in the financial services and housing industries.

Oh, and some special interest groups who have been lobbying Congress will be better off for a couple of weeks before all these negative impacts set in.

Everybody out there should be watching this development like a hawk, because your financial situation may very well depend on the outcome of these recent actions by the President and Congress.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.