While Harry Reid, Nancy Pelosi and other Congressional Democrats mull an auto industry bailout plan, it’s worth recalling a pair of Republican legislators from the past. Among the most derided pieces of 20th century economic policy was introduced by Senator Reed Smoot of Utah and Rep. Willis C. Hawley of Oregon. Signed into law on June 17, 1930, the notorious Smoot-Hawley Act jacked up U.S. tariffs on more than 20,000 imported goods, sparking a global trade war that deepened the Great Depression at home and spread it abroad.
If you had little knowledge of the history of U.S. trade policy, the above paragraph would lead you to believe that Smoot-Hawley was our first foray into tariffs, that it destroyed global trade and that it was the trigger for the Great Depression. Nothing could be further from the truth.
First of all, Smoot-Hawley wasn’t even passed by Congress and signed into law until a full 8-1/2 months after the October 29, 1929 stock market crash. The Great Depression was already well underway by the time Smoot-Hawley was passed.
Secondly, Smoot-Hawley was nothing more than another in a long line of tariff acts. The U.S. successfully employed tariffs for 153 years before Smoot-Hawley, protecting domestic industry and building itself into the world’s preeminent industrial power and its wealthiest nation. Smoot-Hawley raised tariffs only slightly, on average by about 3%, over the previous Fordney-McCumber Tariff Act of 1922, which was widely credited for the success of the American economy during the “roaring ’20s.” The following is a comparison of the “ad valorem” tariff rates of the two acts at the time that Smoot-Hawley was passed, taken from Chapter 8 of my book, Five Short Blasts:
Third, at the very height of the Great Depression in 1933, the U.S. balance of trade had eroded by only $0.67 billion, contributing only 2% to an overall decline in GNP of $33.1 billion. The following table shows how key economic indicators, including GNP, the consumer price index, exports, imports and unemployment tracked as the Great Depression progressed from 1929 through 1940.
When you see the above data, you realize how laughable it is to suggest that Smoot-Hawley had anything to do with the Great Depression. If anything, it was the Great Depression that caused the decline in trade. As another example of that, consider our most recent trade data for last month. We’re already seeing significant declines in both exports and imports, not because of any tariff acts but because the whole global economy is in recession.
Now, Smoot-Hawley was not without its faults. Prior tariff acts always set tariffs at an “ad valorem” rate, which simply means they were set at a fixed percentage of the value of the product being imported. Establishing that value was a contentious, time-consuming process. So Smoot-Hawley tried to simplify things by setting the tariffs in dollar terms, never anticipating the deflationary downward spiral of the Great Depression. As prices spiraled downward, the effective ad valorem rate of the new tariffs, since they were in fixed dollars, soared. So the rest of the world ratcheted up their tariffs as America’s ad valorem rates climbed. Certainly this had a chilling effect on global trade. But since imports declined at about the same rate as exports, the net effect on GNP was negligible. (Something else that “free” trade cheerleaders would like for everyone to foget is that imports are a net drag on GDP. They only want you to focus on exports.) So the only real lesson from Smoot-Hawley is that tariffs must always be set in ad valorem terms, just like the tariff structure I’ve recommended in Five Short Blasts.
These final excerpts from the article merit comment:
The E.U.’s competition commissioner Neelie Kroes cautioned European lawmakers against propping up domestic companies. “All governments,” she said, “have to resist that.” As history teaches, when attempts to protect national economic interests lead to a trade war, everybody loses.
That’s what the people with the trade surplus, which describes the E.U., want you to believe – that everybody loses – when, in fact, it’s impossible for the country with the trade deficit to lose. We’re already in a trade war. We’ve been in one for decades and have been losing badly because we don’t have the guts or common sense to even put up a fight. What history actually teaches us – the more recent history of the past few decades – is that a nation that runs a permanent trade deficit will eventually face economic collapse.
So when you read about someone raising alarm about “protectionism,” ask yourself “What’s the motivation of this person?” Is this someone who benefits by sustaining a trade deficit with the U.S.? If it’s an American politician, are they someone who is supported by companies who have benefited by outsourcing jobs? Are they really interested in a healthy American economy or are they interested in protecting an export business to the U.S.? Or ask yourself why the World Trade Organization actually enforces protectionist tariff policies in favor of developing nations. If tariffs actually help such nations develop their economies, why are they bad for the U.S.? Most importantly, ask yourself how a $700 billion per year trade deficit could possibly be a good thing, and how eliminating it could possibly be detrimental?
Don’t accept these lies about protectionism and tariffs at face value. Do your homework and decide for yourself whether America was better served by the protectionist trade policies of the first 171 years of our nation’s history or the free trade policies of the past six decades.