Thursday, March 19, 2009

Smoot-Hawley Revisited?

This post relates to the following Keystone Economic Principles:
1. We all make choices.
3. All choices have consequences.
4. Economic systems influence choices.
6. Do what you do best; trade for the rest.
8. Quantity and quality of available resources impact living standards.
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

There is a running story that, while important, hasn't been the top story in a lot of places. But if you teach about trade and trade barriers, it can provide a great current example.

The story is that, within the stimulus package, was an item which went back on part of the North American Free Trade Agreement which was passed during the Clinton Administration. Specifically, NAFTA called for Mexican truckers to be allowed to carry goods to and throughout the U.S. This aspect of the treaty has long been postponed under the guise of safety. However, a number of stories indicate that safety is no longer the issue. It may be that the real issue is competition. And in a down economy, peole are more reluctant to face competition.

Mexico (one of our largest trading partners) has warned that going back or further postponing this aspect of NAFTA could have repercussions in the form of tariffs being imposed against U.S. products. That has now come to pass.

I would consider approaching this from a couple of aspects. The first is changing institutions (rules). In this case, the rules were formal treaties/laws agreed to know but now withdrawn from. By changing the rules, people choose differently. In this case, the choice is demonstrated by the Mexican government. And Mexico's choice will have consequences which will affect the quantity and quality of resources in Mexico, just as our choice to back away from this provision of NAFTA will affect the quantity and quality of goods here in the U.S. And those changes will be reflected in higher prices for consumers on both sides of the border.

The second approach is to use this as an example of escalating trade barriers, similar to what was seen in the 1929 Smoot-Hawley Tariff (link to an excellent article in The Economist). What started as small focused tariff bill eventually became a larger, more extensive barrier that provoked responses. The resulting drop in world trade was one of the factors that led to the downturn we now refer to as The Great Depression. In that case, choices to change the institutions (rules) had consequences. And the consequences had an impact on prices and the standard of living.

I'm providing links to a number of news stories so you can get a sense of the issue. When I went to the links, they were free, but they may not remain that way for long. Continued access may require subscription or, at the very least, registration.

Opinion pieces and article from The Wall Street Journal
Washington Starts Another Trade War (opinion)
Mexico Strikes Back in Trade Spat (article)

Congress Doesn't Respect NAFTA (opinion)

Mexico Retaliates (opinion)

Opinion piece and articles from The Washington Post
Truck Stop (opinion)
Mexico Retaliates with Tariffs on 90 US Products (article)

U.S. Farm Exports at Risk over Mexico Truck Dispute (article)

Mexican Tariffs on 89 U.S. Products Take Effect (article)

Opinion piece from The New York Times
A Small and Dangerous Spat (opinion)

I look forward to your comments.

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