James Mahon, writes for Money Observer on why those seeking to navigate a safe passage through the trade war with China should look to US history for lessons.

While the trade war between two great economic superpowers rapidly intensifies, it is sometimes instructive to turn to history to reflect on whether the US and China have learned lessons from their actions in the past.

Economic conflicts tend to be a consequence of protectionism; this is a phrase that holds true for Donald Trump’s latest antics.

An interesting historic parallel is the Smoot-Hawley Tariff Act of 1930. Republicans Reed Smoot and Willis Hawley advanced this legislation with the intentions of gaining greater control over trade and boosting revenues, thereby supporting US industries and safeguarding American workers. Initially President, Herbert Hoover did not endorse this act, but he eventually succumbed to political pressure.

It is ironic that the people who the act was designed to protect were those who suffered the most. The Smoot-Hawley Tariff Act led to a significant deterioration in US trade. This exacerbated the recession and swiftly led to the Great Depression.

Between 1929 and 1933, US GDP tumbled 30% and US exports dropped from $5.2 billion to $1.7 billion, resulting in mass unemployment. By 1933, 60% of Americans were classified as “poor” and between 30% and 40% of banks collapsed. 

Debt and greed caused the Great Depression, but the Smoot-Hawley Act magnified and prolonged it substantially. For investors, it was catastrophic, stocks plummeted 90% from peak to trough (1929-1932) in the context of the Dow Jones having increased 300% from 1924 to 1929.

President Trump’s “easy to win” trade war stems from his conviction that the US retains the upper hand. This belief, in conjunction with other political and economic concerns, including Brexit, emerging market instability, rising interest rates and flattening yield curves, does not instil much confidence.

“History doesn’t repeat itself, but it often rhymes” is attributed to Mark Twain and it is something that we should all bear in mind in such uncertain times.

Real capital preservation is a priority for many people and keeping a steady course by maintaining a long-term view and a balanced appetite for risk and investment choices is crucial if we are to avoid the “rhymes” of the past.

Published article can be viewed here

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