Beggar-thy-Neighbor Pressures Increase

The forces of the worldwide recession are starting to be felt in defensive moves. According to Bloomberg: “Initiatives to curb imports are rising around the world, threatening ‘disastrous consequences,’ the head of the Organization for Economic Cooperation and Development said today.”

The same motivations produced the Smoot-Hawley legislation during the 1930s that exacerbated the Great Depression. While economists pretty are pretty much in agree on the harmful effects of such actions and policies, they are tempting for politicians to employ as “protectors” of local jobs and industries.

Just as harmful is the weakening of one’s currency so as to make exports cheaper to foreigners and imports more expensive. The US has stepped up its pressure on China to let the yuan float. That is a way to devalue the dollar vis a vis the yuan. All countries seem to prefer weaker rather than stronger currencies. Yet this “beggar thy neighbor” cannot work for all.

Protectionism, whether in the form of tariffs or currency manipulation, will cause world trade to shrink. To the extent that occurs, the nations of the world will be made worse off.  If there is a race to devalue currencies, that will rise inflation around the world.

Despite these knowns, politicians will do what is in their best interests, not yours or neighboring countries.

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