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Dear Reader,

Free trade has been an important topic on a global scale recently. Protectionist fears and the implied tariff argument dominate the free trade paradigm. A brief look back in history shows us that protectionism leads towards economic upheaval. The U.S. passed​ the Smoot-Hawley Act of 1930. Essentially, this act applied tariffs to imported consumer products, imported raw materials, semi-manufactured goods, and capital equipment. During the 1930s, America’s trading partners greeted this with a protectionist response. Implications of this bill were tariff revenue decreases of $3.3 billion from 1929 to 1933. Revenues in 1929 were $5.2 billion, and in 1933, revenues were $2 billion. Even before the introduction of this bill, tariffs were 40% on dutiable goods. This act made it considerably more difficult for American enterprise to transact, proving to be one of the worst pieces of American legislation.

With many historical lessons of the past, administrations around the globe still insist on playing the protectionist card. Trump’s plan, if implemented, will be economically destructive, as history has shown. The World Trade Organization has made significant progress to reduce default tariffs to generally low levels. If he dismisses WTO rules in favor of higher tariffs, contracting trade volumes will be imminent. Not only are these tariffs bad for American enterprise, but our trading partners are increasingly hampered with uncompetitive pricing. If trade volumes were to collapse, the currencies used to settle them would collapse as well, which would be disastrous for the dollar. By side-stepping the WTO and seeking to gain more tax revenue, politicians ignore the free market. Artificial tariffs hamper trade and cause distortions across the globe. Global trade that settles in dollars will ultimately show that the quantity of dollars will not be worth the product sought. Redundancy in the dollar will be the problem at hand. “The monetary dynamics are building up to replicate the conditions that led to the abandonment of the $20.67 peg to gold in 1934” (Macleod). During this time, America owned most of the gold reserves in the world. Today, China owns the biggest amount of undeclared gold in the world. The transfer of wealth from America to China in terms of the gold price will be the biggest we’ve ever seen.

 

-Colin Bennett

 

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