Will World Trade Come To A Halt?

Here's an interesting email I received today. It's from Chris Mayer, a newsletter editor. He thinks that the Buy American Mantra might cause global trade to stop as countries everywhere erect trade barriers. Not a pleasant thought.

I’ve come to calling what we’re going through the “The Great Suppression.” It reflects the efforts of nearly every government everywhere to stem the unfolding depression -- even if it means nationalizing the banking system and destroying the currency in the process.

(A short digression on the word “depression”: Time was people called every economic bust a depression. The word “recession” came along later as a euphemism for “depression.” Politicians didn’t want to scare people, you know. In fact, the Oxford English Dictionary says that the word “recession” in this sense first appeared in an edition of The Economist in 1929. I like the old term better. Forget the technical jargon of today’s stuffed shirts.)

The most insidious effort of the Great Suppression is the clampdown on trade, which I’ve noted as a possible risk in prior alerts. It seems a natural turn of events. Economy gets bad. People lose their jobs. Workers clamor for help. Government blocks foreign competitors. Trade wars ensue.

The stimulus plan includes a “Buy American” provision. This means that any money toward infrastructure spending must use American-made iron and steel, equipment, etc. Sound good?

Well, funny thing is the companies that would benefit the most oppose the idea. Here is a quote from a Caterpillar spokesman:

“There is no company that is going to benefit more from the stimulus package than Caterpillar, but I am telling you that by embracing Buy American, you are undermining our ability to export U.S.-produced products overseas. Any student of history will tell you that one of the most significant mistakes of the 1930s is when the U.S. embraced protectionism. It had a cascading effect that ground world trade almost to a halt, and turned a one-year recession into the Great Depression.”

He overstates his case when he says the Great Depression would’ve been a one-year recession otherwise. Who is to say what might’ve happened? But it is clear that trade did grind to a halt. It is clear on the historical record that countries raised tariffs everywhere. It is clear that this did not help, and it took decades to unwind the damage to world trade.

As you know, I’ve been spending some time studying the Great Depression and the markets of the time. It’s like reading a realistic horror story. I am chilled by the spooky similarities between then and now. In fact, America in 1933 did implement a “Buy American” provision.

Whatever your political leanings on this question, you better think clearly when you invest your money. This provision is a big potential negative for investors. We own several American companies that have significant export businesses.

These are things I will watch carefully. A freeze in global trade will definitely have an impact on how we invest, should such a freeze materialize.

One thing I learned in Economics class was that trade tariffs have a net loss effect on the consumer. Of course, politicians never learn anything about economics. They're just interested in power and being relected!