The Smoot-Hawley Bailout

The Smoot-Hawley Tarrif Act was a bill designed to prevent American jobs from going overseas, that helped turn the Great Recession into the Great Depression. It created a “beggar-thy-neighbor” policy, as every country tried to limit the damage by restricting even more trade. The global economy went into a death spiral.

And not surprisingly, Washington wants to do it again. If you thought the Bush-Pelosi Financial Industry Bailout was bad, wait until the Smoot-Hawley Auto Bailout becomes an international incident:

News Analysis – Washington Takes Risks With Its Auto Bailout Plans – NYTimes.com
And the third risk — one barely discussed so far — is that in trying to save the nation’s carmakers, the United States is violating at least the spirit of what it has preached around the world for two decades. The United States has demanded that nations treat American companies on their soil the same way they treat their home-grown industries, a concept called “national treatment.”

Yet so far, there is no talk of offering aid to Toyota, Honda, BMW or the other foreign automakers that have built factories on American soil, employed American workers and managed to make a profit doing so.

“If Japan was doing this, we’d be threatening billions of dollars in retaliation,” said Jeffrey Garten, a professor at the Yale School of Management, who as under secretary of commerce in the 1990s was one of many government officials who tried in vain to get Detroit prepared for a world of international competition. “In fact, when they did something a lot more subtle, we threatened exactly that,” referring to calls for import restrictions.

A Detroit bailout will expand protectionism and limit research and development work in the United States. Saving shareholders and union men from their own mistake is not worth damage to the global economy.

And if the Detroit Bailout passes, and we damage the global economy, what is our reward? Yet Another Detroit Bailout.

Update: If we begin a subsidy trade war, Germany is preparing to respond. Hat-tip to Economist’s View.

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