Cord Blomquist

The New Smoots OR Silicon is the New Steel

Remember the Smoot-Hawley Act? The famous, or perhaps rightly called infamous, act was seen as a solution to America’s economic woes during the deep economic downturn of the 1920s. The results, much to the confusion and dismay of the bill’s author’s Representative W.C. Hawley and Senator Reed Smoot were nothing short of disastrous.

Why does this matter to us today? Well, we’re seeing a lot of Smoots and a lot of Hawleys running around Capitol Hill these days. With free trade agreements with South Korea and Columbia floating around the offices in Congress offering potential relief from high prices for consumers, members of Congress are increasingly tempted to ignore these consumer benefits in order to benefit their individual constituencies. Rather than seeing trade as something that benefits consumers, Congressmen only see a loss in jobs.

But will blocking agreements help domestic producers? Not tech powerhouses like Apple, Google, Microsoft and Cisco. For these firms to continue to innovate, create investor value, and create jobs, they need to have affordable raw materials.

Much of this raw material comes from places like Korea, a country with a Free Trade Agreement (FTA) currently pending in Congress. By not removing trade barriers with Korea, we not only force consumers to pay more, we also force our domestic tech firms to pay higher prices.


After all, it’s not only consumers that buy products from overseas, domestic manufacturers are also buyers. The Smoot-Hawley act levied an incredible tax on steel, causing domestic steel makers to sell more steel, but costing every other industry that used steel. Similarly, not approving a Korean FTA might help domestic chip makers, but it hurts everyone who makes things using chips.

This, in turn, leaves these companies with less money for new hires or for making capital investments that will grow their business and create a demand for hires in the future.

The public is assaulted with appeals to emotion by the likes of Lou Dobbs and other intellectually bankrupt members of the media. Dobbs and those like him show unemployment lines in their newscasts and cite factories that close due to overseas competition. What they don’t show, however, are the jobs lost or never created due to higher costs of the materials for making finished goods.

Since the passing of NAFTA, job gains have more than offset job losses. Sure, there is an adjustment process that takes place as the creative destruction of the free market does include that pesky destruction part, but this beats falling behind global competitors in a fruitless effort to forever maintain the status-quo.

Good tech policy reaches beyond esoteric topics like patent law and net neutrality. Sometimes it’s old-fashioned economics. If the United State is to maintain its position as the economic juggernaut of the world, free trade is the only way to go. Without it, consumers pay more, businesses pay more, and we lose our competitive edge.

March 26, 2008 | Comments |

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    Cord, I agree. One thing to keep in mind, though: some of these agreements are loaded up with provisions that have nothing to do with lowering trade barriers. For example, we had Gwen Hinze on the podcast last summer to talk about the copyright-related provisions of the Korean agreement, which required Korea to make various changes to its domestic copyright laws that benefit Hollywood at the expense of Korean consumers. I don't think this is a reason to reject the FTAs, but I do wish more free traders would be more vocal about objecting to this kind of rent-seeking. Building momentum for free trade is hard enough without alienating potential allies over unrelated issues like copyright law.
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    Tim, you're right. Basically, Free Trade Agreements should be just that. Right now, they're sorta free trade agreements, which isn't that great. It's a bit of two steps forward and one step back, but at least we're moving in the right direction.

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