Do you recall Jack Braganza from the popular Hindi movie Bobby (1973)? The affable patriarch wore his marriage suit while visiting the house of Raj, his daughter Bobby’s lover, to discuss their marriage proposal. The suit would not fit him after so many years, but that was perhaps all he had in the name of formal attire.
In the movie, this scene created a comic sense. However, in real life it is not uncommon in millions of lower middle-class Indian families. The men use their wedding attire for decades, before they get a new one made, usually for their children’s marriages.
The narratives that are being built around, arguably, a blunderous act of the incumbent president of the United States (POTUS), reminded me of this movie scene. Experts are trying to use an old jacket to fit the current scenario, based on their personal perceptions and linkages. Some people, harshly critical of the POTUS, have tried to fit the 1930 trade war triggered by the Smoot-Hawley Tariff Act in 1930 – that would plunge the world into a crisis. Some POTUS followers are comparing it with the 1933 & 1938 New Deal – that would help rebuilding America. Yet some others are terming this as a fresh version of the Plaza Accord (1985) – that will usher a new era of global cooperation, progress and American dominance.
In my view, 2025 is an extremely different world from 1930, 1938 or 1985. None of these old jackets may fit the current situation. History is definitely not repeating itself. It may be rhyming to the limited extent
1929-30 – Trade war, Smoot-Hawley Tariff Act in 1930
The US government chose to protect the domestic economy from the adverse impacts of economic crisis building in Europe by undertaking protectionist measures. The Smoot-Hawley Tariff Act, was passed in 1930, to raise import duties by ~20% on over 20000 items. The motive was to protect American farmers and businesses from the global competition and boost domestic manufacturing employment.
The Smoot-Hawley Act led to a significant decline in international trade as 25 countries retaliated with higher tariffs. For example, Canada imposed tariffs on 16 U.S. products, covering 30% of U.S. exports to Canada. U.S. imports fell 66% ($4.4B in 1929 to $1.5B in 1933), exports dropped 61% ($5.4B to $2.1B), and global trade declined 66% (1929–1934). U.S. GDP fell from $103.1B (1929) to $55.6B (1933); unemployment rose from 8% (1930) to 25% (1933).
The Smoot-Hawley Act was widely regarded as a policy blunder, which along with the monetary policy blunder of raising rates during a visible slow down, exacerbated deflationary pressures, leading the world into one of the worst economic depressions ever witnessed.
Another fallout of this tariff was that Senator Smoot and Congressman Hawley (authors of the Act) lost their respective seats in 1932; Republicans faced a historic Senate swing. The Reciprocal Trade Agreements Act (1934) shifted tariff authority to the president, reducing protectionism. Incidentally the incumbent POTUS has used the same authority to start the latest tariff war.
1933-1939 - New Deal, Keynesian government
After a resounding victory in 1932 elections, President Franklin D. Roosevelt offered a deal that would provide immediate relief to the people, especially unemployed and poor and stimulate economic growth through public spending and industrial/agricultural reforms. The deal comprised the five main elements-
1. Civilian Conservation Corps (CCC) and Federal Emergency Relief Administration (FERA) provided jobs and direct aid.
2. National Industrial Recovery Act (NIRA) and Agricultural Adjustment Act (AAA) regulated production and prices to stabilize industries and farms.
3. Glass-Steagall Act (banking regulation), Securities Act (stock market oversight), and Social Security Act (pensions/unemployment insurance) to reform financial and capital markets.
4. Public Works Administration (PWA) and Works Progress Administration (WPA) funded roads, dams, and schools, employing millions.
5. Dilution of Smoot-Hawley tariffs, to empower the president to negotiate bilateral trade deals, boosting exports.
The reforms initiated under the New Deal reduced unemployment from 25% (1933) to 14% (1937), though full recovery awaited World War II. GDP grew steadily (e.g., 10.8% in 1934). Public works created lasting infrastructure (e.g., Hoover Dam). However, the increased reliance on deficit spending and regulation sparked intense debates about government overreach. Besides, some programs (e.g., NIRA) were struck down as unconstitutional, and recovery was uneven. Some critics argued that the New Deal prolonged the Depression by distorting markets.
1985 – Plaza Accord, trade corrections, sanctifying active market management
On 22nd September of 1985, the representatives from the now defunct G-5 met at Plaza Hotel, New York to discuss one of the most remarkable currency manipulation plans. On that afternoon, the US, France, Germany, UK, and Japan signed the Plaza Accord to weaken the US dollar to help the US reduce its burgeoning trade deficit.
As part of the accord, the US agreed to cut its fiscal deficit materially; while Germany and Japan consented to boost their domestic demand by cutting taxes. All parties agreed to actively “manage” their currency markets to “correct” their current account imbalances.
In backdrop to the Plaza Accord, the US Dollar had appreciated about 48% during 1980-1985, primarily induced by the sharp hikes in the policy rates by the US Federal Reserve, led by the Paul Volcker; pressurizing the US manufacturing by making (i) imports from Japan and Germany more competitive and (ii) exports to other countries less competitive. This was the time when US manufacturing giants like IBM and Caterpillar were facing severe stress and lobbying the US Congress for relief.
The US Dollar (USD) depreciated 40-50% against Japanese Yen (JPY) and German Mark (DEM) in the two years following the Plaza Accord. The plan worked with limited success but not without material collateral damage. The US-Japan trade sustained as Japanese automobile and electronic products continued to overwhelm the US consumers. US-Germany trade imbalance corrected materially. A stronger JPY, in addition to the monetary policy blunders of the Bank of Japan (BoJ), however resulted in severe deflationary conditions in the Japanese economy, resulting in the famous “lost decade”.
The Black Monday (19th October 1987) crash of the stock markets over exposed several faults lines in the Plaza Accord.
Conclusion:
Smoot-Hawley was protectionist, prioritizing domestic interests at global expense, and failed miserably pushing the global economy into a deep abyss. The New Deal blended interventionism with trade liberalization. It had limited economic success but introduced several structural anomalies, like wider and deeper regulatory overreach. The Plaza Accord sanctified active market intervention by the government and monetary authorities. It had some short-term success, but long-term impacts have been mostly negative, especially on the German and Japanese economies.
In my view, the current global landscape is fundamentally different from the 1930, 1938 and 1985. Comparing the latest tariff war to push the Make America Great Again (MAGA) campaign to any of the historical precedents would be a futile oversimplification.
…to continue tomorrow
No comments:
Post a Comment