Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Global Economic Recovery 2021 and the Dark Legacies of Smoot-Hawley

Economics / Protectionism May 05, 2021 - 12:19 PM GMT

By: Dan_Steinbock

Economics In 2021, China’s economic momentum will drive global economic prospects. But new trade wars could derail global recovery, again.

In the 1st quarter of the ongoing year, China’s GDP rose to a record 18.3% year-on-year. Despite the base effect, due to the pandemic plunge a year ago, the performance reflects strong momentum. In April, China’s economy continued to boom, with strong exports and rising business confidence supporting the recovery.

U.S. economic growth accelerated in the 1st quarter, thanks to a rush of consumer spending. The GDP expanded at a 6.4% annualized rate; the second-largest since 2003. But it missed the estimates by 0.3 percent. Moreover, it was fueled by two rounds of huge stimulus payments, ultra-low interest rates and historical debt-taking.



In normal and rational times, the Chinese and US performance would fuel a strong global recovery. But in our divided, not-so-rational world, the combined strength of the world’s largest economies is no longer an assurance of solid global expansion.

In 2017, global recovery was just around the corner, too. Then, the Trump administration’s trade wars undermined those hopes, which, in turn, derailed global expansion, well before the record coronavirus contraction.

In 2021, the same policy mistakes could penalize global economic prospects. Except that this time, the net outcome would be far, far worse.        

Dark legacies of the 1930 Smoot-Hawley, déjà vu            

As long as the Biden-Blinken approach to international trade will look like a replica of the Trump-Pompeo tariff war, neither US recovery nor global recovery are likely to prove sustained. Over time, trade wars will undermine both.

In that dark path, there is a historical precedent. After the 1929 contraction, the US Tariff Act of 1930, known as the Smoot–Hawley Tariff, paved the way to protectionist trade. The consequent tariffs were the second highest in US history.

The objective of the Smoot-Hawley was to protect American workers and jobs, while boosting U.S. economy. The actual results turned out to be precisely the reverse. After President Hoover had signed the Act, US trading partners enacted their tariffs in retaliation, thereby reducing US exports and imports by almost 70 percent.

Today, the Smoot-Hawley Act is widely seen as the trigger that fed into and worsened the Great Depression. It prolonged the lingering contraction, thereby paving the way to World War II.

From the standpoint of U.S.-Sino trade, the relative magnitudes today are similar, with close to 70% tariffs. But in the interdependent world economy, the stakes are far higher and more global (Figure 1). 

Figure 1       US tariff wars and the dark legacies of Smoot-Hawley

The damage of the Trump tariffs undermined global recovery in 2018-20, which made the world economy more vulnerable prior to the global pandemic and the massive coronavirus contraction, which proved worse than the Great Depression.

In a benign scenario, the net effect of further escalation could translate to missed opportunities in global investment, trade, and finance. A malignant scenario would ensure a plunge in all three. That, in turn, has potential to derail the fragile global post-pandemic recovery even further, prolong its adverse impact and extend the lost years, even lost decade in poorer economies.

China’s economic rise, US geopolitical responses          

For three decades, US-Sino policies reflected normalization and expansion, which contributed to strong global economic prospects until the West’s huge financial crisis in 2008/9 and Europe’s subsequent sovereign debt crisis. Thereafter, those supportive bilateral policies have eroded.

In normal and rational times, China’s rise would make its economy the world’s largest in the late 2020s, which would strongly support global recovery. But in our divided, not-so-rational world, a series of major initiatives by the Obama, Trump and now Biden administration, so it seems, seek to slow or derail those economic prospects (Figure 2).

Figure 2       GDP Growth: China’s Economic Rise, US Geopolitical Responses



* GDP expansion in trillions of US dollars.

In the early 2010s, the Obama administration initiated its geopolitical “pivot to Asia” stressing primarily military and rearmament prospects. Next, it launched the Trans-Pacific Partnership (TPP) and the Indo-Pacific alliance, with the former excluding China and the latter seeking to contain its rise. Exclusionary policies suggest that the purpose is not to discuss, debate and resolve trade disagreements, but to compound dissension, disputation and division.

The Trump administration escalated these policy mistakes by defining China as a “military adversary,” while launching the ill-advised tariff wars. Meanwhile xenophobic rhetoric accelerated into its violent anti-Asian manifestations.

In its first 100 days, the Biden administration, it seems, has been building on the past mistakes seeking to “multilateralize” Trump’s anti-China campaigns. The ultimate goal seems to be an effort to use the US-led Indo-Pacific alliance to undermine China regionally, while leaning to Europe to expand that objective internationally.

The net effect is to destabilize China’s economy so that its size would not surpass that of the United States in the next few years. That’s why trade wars play an instrumental role in this dark vision. The protectionist instinct, as Adam Posen, the president of the Peterson Institute for International Economics recently warned, is accompanied by “America’s self-defeating retreat.”

Global recovery or geopolitical turmoil        

Assuming progressive normalization and relative international stability, China’s growth is likely to exceed 6.5% and it has potential up to 8-9% growth in 2021, with likely deceleration to 6% in 2022.

Any effort to undermine China’s economic growth will effectively penalize not just China, but US recovery and global economic prospects. One way or another, the implications will reverberate worldwide.

Nonetheless, the dark legacies of the Smoot-Hawley and its horrible aftermath should caution all policy excesses in the foreseeable future. Prosperity cannot be built without stability. And stability cannot be achieved without peace.

Dr. Dan Steinbock is the founder of Difference Group and has served at the India, China and America Institute (US), Shanghai Institute for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/  

© 2021 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Dan Steinbock Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in