Moneycontrol Pro Weekender | Back to the 1930s

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Dear Reader,

In 1930, when the US was reeling under the impact of the stock market crash of 1929 and the Great Depression, lawmakers passed the Smoot-Hawley Tariff Act, which raised already high import tariffs by another 20 percent. The economist Jagdish Bhagwati called it “the most visible and dramatic act of anti-trade folly”.

Why are people talking about the Smoot-Hawley Act now, almost a century later? Because economists say the US is all set to make the same mistakes. It has abandoned globalisation and free trade for an “America First” approach, which is likely to be cordially reciprocated by other countries, just as it happened in the 1930s.

But is it really a mistake? South Korean economist Ha Joon-Chang wrote the go-to book on this topic, called ‘Kicking Away the Ladder’. The title is taken from German economist and political theorist Friedrich List, who wrote, “Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth.” In other words, free trade is a strategy, just like protectionism, appropriate to a certain stage of economic development of a country.

Britain, of course, is the original free trader, when it realised that it had secured a huge lead in industrialisation and could flood the markets of other countries by its cheap manufactures. That’s when it discovered the virtues of free trade. In an article published here in December 2003, Ha Joon-Chang and John Gershman wrote, “It ended when Britain finally acknowledged that it had lost its manufacturing eminence and re-introduced tariffs on a large scale in 1932.’’ But Britain had an empire and, while it raised tariffs on goods imported from other countries, it gave preferential treatment to goods from its Empire—a policy called “Imperial Preference”. The world split up into trade blocs, as is happening again now.

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Manas Chakravarty

Group Consulting Editor|Moneycontrol

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The US, on the other hand, had very high import tariffs right up to the Second World War. The piece by Ha Joon-Chang and John Gershman pointed out, “Between 1816 and the end of the Second World War, the US had one of the highest average tariff rates on manufacturing imports in the world”, adding “It was only after the Second World War, with its industrial supremacy unchallenged, that the US liberalised its trade (although not as unequivocally as Britain did in the mid-19^th century) and started championing the cause of free trade–once again proving List right on his “ladder-kicking” metaphor”.

So, why is the US now going in for protectionism again? There are plenty of explanations, the most popular one being that the US working class was hurt by the wholesale shift of manufacturing jobs to China and other emerging markets. But do the views of the US working class, or for that matter the working class anywhere, matter? Another argument points to China’s increasing technological sophistication and the fears that it will challenge the US in technology. As long as China exported toys and low-priced consumer goods to the US, that was fine, because US companies had long abandoned those areas. As Ho-fung Hung, a sociologist at Johns Hopkins University, wrote, “Chinese state-owned companies were squeezing out American companies in the Chinese market, and now they were squeezing out American companies in the international market in the developing world.” Indeed, they are now flooding even the European markets. No wonder that Xi Jinping has been posing as the champion of globalisation.

But once China climbed the technology ladder and their firms started competing with US ones, it was time for the US to kick away the ladder, which ironically in this case was free trade, and embrace industrial policy and tariffs once again. It’s exactly what the UK did in the thirties. Note that back in the nineteen eighties, when the bogey of a rising Japan about to supplant the US was raised, the US started a semiconductor war against Japan, a precursor to the current tech wars. Free trade has always been a fig leaf, and Trump has never had much use for fig leaves.

Indeed, the most important conflict in the world today—the principal contradiction, as Xi Jinping would put it—is the conflict between the US and China for pre-eminence in the world economy. National security is going to dictate policy. Politics will rule economics, without any fig leaf. As this FT article says, “Europe today is like a well-dressed flâneur who is unaware he’s about to be attacked in an alley by a couple of street thugs’’— the thugs being the US under Trump and China under Xi Jinping. It says Europe needs to learn some hard lessons about the nature of power. And what it says about Europe could just as well apply to many other countries. More importantly, the international organisations built up since the Second World War have all been rendered toothless. It’s every nation for itself now and the devil take the hindmost. We’re back to the world of the 1930s, this time with nukes.

John Maynard Keynes wrote at that time, in 1933, “I seek to point out that the world towards which we are uneasily moving is quite different from the ideal economic internationalism of our fathers, and that contemporary policies must not be judged on the maxims of that former faith.” Later events were to prove that he would have done well to severely judge those “contemporary policies’’.

Meanwhile, the stock markets continue to rally. As WH Auden wrote in his poem titled ‘September 1, 1939’, the day the Second World War began:

“Faces along the bar
Cling to their average day:
The lights must never go out,
The music must always play.”

Cheers,

Manas Chakravarty

In case you missed them, here are some of the stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:

Stocks

Why this Waree Energies merits attention, post correction, Home First Finance, International Gemmological Institute (India) IPO, Best stocks to play the strong growth in the mutual fund industry, IKS Health IPO,  KEC International, Niva Bupa, Yes Bank, MobiKwik IPO, Vishal Mega Mart IPO, Sai Life IPO, Should investors avoid the FMCG sector now? Bikaji Foods,  Waree Energies, Britannia, MapmyIndia: Will the stock rerate after the apparent victory of minority shareholders?

Markets

India-dedicated global funds see marginal increase in inflows after $1-bn redemption since October

Golden era for Indian capital markets; over a dozen stocks to ride the wave, says Motilal Oswal report

Can the US monetise Bitcoin as a currency

Ambit retains Zomato as its core holding, says business model only partly imitable by Swiggy, Zepto

Financial Times

Wall Street’s complex debt bonanza hits fastest pace since 2007

If peace breaks out in Ukraine

It’s time for a shift in approach to carbon credits

Companies and sectors

Michelin Camso buyout to drive Ceat’s earnings prospects, Godrej Consumer, LG India IPO, EV Batteries, India’s contract pharma research market, Real estate majors flocking to Mumbai’s redevelopment market, Insurers that rely on parent banks for distribution may be in the firing line, Advent’s rush to scale up Suven Pharma leads it to another acquisition, Biocon Biologics' success in biosimilars points to the future pathway for Indian pharma

Economy & Policy

November retail inflation strengthens case for February rate cut

India’s infra story needs credit

How to crank up the manufacturing engine?

Collateral-free agri loans set to increase

India’s private healthcare firms to drive growth, but will hurt affordability

Why the 50 bps CRR cut may not move the needle

A booming securitisation market would be put to the test soon

RBI policy has an unintended consequence (arbitrage) -- and an intended one (boosting bank margins)

Shaktikanta Das era ends

Are Indian businesses getting smaller?

Electronics—looking for the right emphasis

Pro Economic Tracker

COP29 and climate finance

Geopolitics

Nepal-China deal poses strategic challenge to India

Tech & Startups

VCs will chase startups that help make money move in 2025

Gen AI challenges IT offshore models

Can Protean replicate its government legacy in the new-age tech business?

Personal Finance

Why the angst against SIP is futile