What the Smoot Hawley Tariff Can Teach Protectionists Today

Those Who Don't Learn From Smoot-Hawley Are Doomed to Repeat It

farmer during depression
A farmer cultivating corn with fertilizer on a horse drawn plow at the Wabash Farms, Loogootee, Indiana, June 1938. Photo by Arthur Rothstein/Underwood Archives/Getty Images

Definition: The Smoot-Hawley Tariff is the Tariff Act of 1930. It increased 900 import tariffs by an average of 40 percent to 48 percent. Most economists blame it for worsening the Great Depression. By doing that, it also contributed to the start of World War II.

In June 1930, the Smoot-Hawley Act raised already-high U.S. tariffs on foreign agricultural imports. The purpose was to support U.S. farmers who had been ravaged by the Dust Bowl.

The resultant high food prices hurt Americans who were already suffering from the Great Depression. It also compelled other countries to retaliate with their own tariffs. That forced global trade down by 65 percent. 

Smoot-Hawley showed how dangerous trade protectionism is to the global economy. Since then, world leaders advocate free trade agreements that promote increased trade for all participants.

History

America had many characteristics of a traditional economy prior to the Depression. Almost 25 percent of Americans were farmers. 

Between 1915 and 1918, food prices skyrocketed as the world recovered from World War I. That demand created speculation in farmland. By the 1920s, farmers had taken on debt to fund growth and pay for the land. But as Europe recovered, food prices abruptly returned to normal. Debt-laden farmers faced bankruptcy.

Congress wanted to protect these farmers from the suddenly cheap agricultural imports.

It had proposed other bills to support prices and subsidize food exports, but Calvin Coolidge had vetoed them all. So Congress shifted its strategy. It sought to raised farm tariffs to the same high level as manufactured goods. (Source: "The Smoot-Hawley Tariff and the Great Depression," CATO Institute, May 7, 2016.)

The 1930 Tariff Act is named after its sponsors. Congressman Willis Hawley from Oregon was the chairman of the House Ways and Means Committee. Senator Reed Smoot wanted to protect the sugar beet business in his home states of Utah. 

As the bill wound its way through Congress, every legislator saw it as a tool to protect their states' industries. By 1929, the bill proposed tariffs on 20,000 imported goods. 

Economists, business leaders, and newspaper editors completely opposed the bill. They knew it would become a barrier to international trade. Other countries would retaliate. The tariffs would also raise import prices. 

Congress debated the bill as the stock market crashed in October 1929. During his presidential campaign, Herbert Hoover argued for more tariff equality. As President, he felt compelled to make good on his promise. 

Did It Cause the Depression?

The timing of the bill's passage through Congress affected the stock market. 

  • May 28, 1929. Smoot-Hawly passes the House. Stock prices drop to 191
  • June 19. Senate Republicans revise bill. Market rallies, hitting its peak of 216 on September 3. 
  • October 21. Senate adds tariffs to non-farm imports. Black Thursday stock market crash.
  • October 31. Presidential candidate Hoover supports bill. Foreigners start withdrawing capital.
  • March 24, 1930. Senate passes the bill. Stocks fall.
  • June 17, 1930. Hoover signs the bill into law. Stocks drop to 140 in July. 

Tariffs forced import prices up 45 percent. Millions of Americans had just lost everything in the stock market crash. Overnight, imports became unaffordable luxuries for all but the wealthy. It made it harder for those who lost their jobs to afford anything but domestically-produced goods. The volume of imports fell by 40 percent in the next two years. (Source: "The Battle of Smoot-Hawley," The Economist, December 18, 2008.)

Canada, Europe, and other nations swiftly retaliated by raising tariffs on U.S. exports. As a result, U.S. exports fell from $7 billion in 1929 to $2.5 billion in 1932. Farm exports fell to a third of their 1929 level by 1933.

Global trade plummeted 65 percent.

That made it difficult for American exporters to remain in business. For example, tariffs on cheap imported wool rags rose by 140 percent. Five hundred U.S. plants employed 60,000 workers to use the rags to make cheap clothing. U.S. auto manufacturers suffered from tariffs on 800 products they used. 

At the time, exports comprised 5 percent of gross domestic product. (Source: "Smoot and Hawley, the Ghosts of Tariffs Past, Haunt the White House," The Guardian, January 29, 2017. )

Smoot-Hawley's Lessons for Today

President Donald Trump advocates a return to trade protectionism to increase U.S. jobs. He immediately withdrew from the Trans-Pacific Partnership, the biggest trade agreement since NAFTA. He threatened to renegotiate from NAFTA if Mexico refused to pay for a $20 billion border wall. He also warned Mexico and China he would raise tariffs by 30 percent to lower the U.S. trade deficit with those countries. 

Protectionism would have a more devastating effect in 2017 than it did in 1929. That's because exports comprise 13 percent of U.S. gross domestic product. Most of that is oil, commercial aircraft, and automobiles. These industries would be hit very hard by a trade war.