I’m surprised that free trade globalists haven’t done it sooner but, as reported in the above-linked Reuters article, the president of the U.S. Chamber of Commerce has dredged up the old Smoot-Hawley boogeyman to try to scare people into opposing the Trump trade agenda.
“No, I don’t think the tariffs will be permanent,” Donohue said, adding that this would “screw the economy” in ways similar to the 1930s Smoot-Hawley Tariff, referring to a protectionist law that raised thousands of U.S. tariffs and which many economists believe exacerbated the Depression.
My apologies to those who have followed this blog for a long time, as I’ve posted on this topic many times before. But the message bears repeating anytime anyone resorts to this tired argument against tariffs.
The above quote would leave those unfamiliar with trade history with the impression that the Smoot-Hawley Tariff Act represented a turn away from free trade toward protectionism, triggering a global depression. Nothing could be further from the truth. Here are the facts:
- From its founding, the U.S. relied upon tariffs to establish itself as the world’s preeminent industrial power. In fact, until 1913 when the constitution was amended to establish an income tax, all federal revenue was derived from tariffs.
- The Fordney-McCumber Tariff Act of 1922 was widely credited for the economic boom times of the “roaring ’20s.”
- The Smoot-Hawley Tariff Act represented only a very minor tweaking of tariff rates – on average only a 2.7% change from the Fordney-McCumber Act.
- Smoot-Hawley wasn’t enacted until June, 1930, a full seven months after the stock market crash of October, 1929 which caused the failure of thousands of banks.
- At the worst depth of the Great Recession that followed the market crash, America’s exports had contracted by only $6.5 billion, while the economy, as measured by gross domestic product, contracted $33.1 billion. It was actually the world-wide depression that caused exports to shrink, and not vice versa. We saw exactly the same phenomenon during the “Great Recession” which began in 2008. That came at the peak of free trade policy and yet trade contracted dramatically as the world sank into recession.
“U.S. Chamber of Commerce President Tom Donohue said on Wednesday that the Trump administration could still avoid a full-blown global trade war …”
It doesn’t seem to occur to Mr. Donohue that the Trump administration may not want to avoid a “full-blown global trade war.” In fact, the U.S. has been in such a war since the signing of the Global Agreement on Tariffs and Trade in 1947, a war we’ve been losing badly because we weren’t willing to put up a fight. The free-traders that gained traction in the wake of World War II had pulled the wool over our eyes. Thankfully, we finally have a president who sees what a failure that approach has been.