It's starting to feel a little bit like June 1930. And that's worrisome.
In that month, President Herbert Hoover, despite deep misgivings, signed into law the Tariff Act of 1930, better known as the Smoot-Hawley Tariff after its co-sponsors. By raising U.S. tariffs, the act set in motion a trade war that devastated the global economy and helped create the Great Depression.
Watching the unilateral decision by the Japanese to intervene in the currency markets to force down the price of the yen and protect Japanese exports, I've started to worry about a replay of that history.
This time the starring role would go to beggar-your-neighbor currency interventions and not to a tariff. But the effect could be the same: Each of the world's governments, in trying to protect the interests of its own economy, would help kill off growth in the global economy.
The protection racket
Let's start with a little history. The main goal of the 1930 tariff was to protect U.S. jobs and farmers after the U.S. economy entered what would become the Great Depression following the 1929 stock market crash. The tariff, championed by Sen. Reed Smoot, R-Utah, and Rep. Willis Hawley, R-Ore., raised U.S. tariffs on more than 20,000 imported goods. On some goods, the increase took tariffs up to 60%. The overall effective tariff rate climbed to 19.8% in 1933 from 13.5% in 1929.Economists debate exactly how important the tariff was in creating the Depression. Although the overall tariff levels were the second-highest in U.S. history, the United States then, as now, wasn't an export-driven economy. In 1929, imports accounted for just 4.2% of U.S. gross domestic product and exports only 5%. Economists such as Milton Friedman and Anna Schwartz have argued (see their 1963 book "A Monetary History of the United States, 1867-1960") that monetary policy was a far more important cause of the Depression than tariffs or other demand-side policies.
But Smoot-Hawley definitely set off a global trade war that began even before the bill became law. By September 1929, the Hoover administration had received protests and threats of retaliation from 23 U.S. trading partners. Canada was the first to strike: In May 1930, it raised tariffs 30% on U.S. exports to Canada.
From 1929 to 1933, as the Great Depression bit and other countries raised tariffs to protect their own industries -- or found alternatives to trading with the United States -- U.S. exports fell 61%. U.S. imports fell even faster, by 66%. World trade collapsed as well, sinking 66% from 1929 to 1934.
A yen for intervention
It's the last part of this history that makes me worried about the global economy right now. Japan has moved to sell trillions of yen in an effort to drive down the price of its currency against those of its major trading partners. The intervention is designed to aid Japan's exporters, who were getting killed before the intervention as the yen climbed to 83 to the dollar. The Japanese government has argued that it needed to intervene because other countries (China is the name it won't say) are manipulating their exchange rates to subsidize their own exporters.I can understand the temptation to intervene and protect Japanese exporters, and there is no doubt that China -- and other countries -- are keeping their currencies artificially cheap. But the argument that Japan needs to intervene in the currency markets because the yen is too strong doesn't hold water. Once you correct for years and years of Japanese deflation, the real yen-to-dollar exchange rate is pretty much where it has been for the past 25 years. Before the intervention, the real yen-dollar exchange rate index was at 100.2. The average for 1986 through 2010 was 100 on that index.
What Japanese exporters are really protesting is the end of the supercheap yen of 2002-07 that fueled Japan's export-led recovery of those years. And what they're looking for is a return to the good old days when, in 1995, Japanese exporters had 95% of the global DVD market and 40% of the global market for memory chips. By 2006, Japan's market share in those two categories had tumbled to 20% and 10%, respectively.
The real problem for the Japanese economy is that Japanese exporters have steadily lost their competitive edge in the global economy.
Continued: Exporters need importers
