What the Smoot Hawley Act Can Teach Protectionists Today
The Smoot-Hawley Act is the Tariff Act of 1930. It increased 900 import tariffs by an average of 40% to 50%. Most economists blame it for worsening the Great Depression. It also contributed to the start of World War II.
In June 1930, Smoot-Hawley raised already high U.S. tariffs on foreign agricultural imports. The purpose was to support U.S. farmers who had been ravaged by the Depression. Instead, it raised food prices. It also compelled other countries to retaliate with their own tariffs. That forced global trade down by 65%.
America had many characteristics of a traditional economy prior to the Depression. Almost 20% of Americans were farmers. Between 1915 and 1918, food prices skyrocketed as the world recovered from World War I. High demand for food created speculation in farmland. By the 1920s, farmers had taken on debt to fund growth and pay for the land. As Europe recovered, food prices abruptly returned to normal but debt-laden U.S. farmers faced bankruptcy.
Congress wanted to protect American farmers from the now cheap agricultural imports. It had proposed other bills to support prices and subsidize food exports, but President Calvin Coolidge had vetoed them all. So Congress shifted its strategy. It sought to raise farm tariffs to the same level as tariffs on manufactured goods. Raising tariffs had worked with the Fordney-McCumber Tariff in 1922.
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 state of Utah.
As the bill wound its way through Congress, every legislator wanted to add protections for 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, and 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 made good on his promise.
Effect on the Depression
The timing of the bill's passage through Congress affected the stock market.
- May 28, 1929: Smoot-Hawley passed the House. Stock prices dropped to 191 points.
- June 19: Senate Republicans revised the bill. Market rallied, hitting its peak of 216 on September 3.
- October 21: Senate added tariffs to non-farm imports. Black Thursday stock market crashed.
- October 31: Presidential candidate Hoover supported the bill. Foreigners started withdrawing capital.
- March 24, 1930: Senate passed the bill. Stocks fell.
- June 17, 1930: Hoover signed the bill into law. Stocks dropped to 140 in July.
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 domestic goods.
Canada, Europe, and other nations swiftly retaliated by raising tariffs on U.S. exports. As a result, 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%. That made it difficult for American manufacturers to remain in business. For example, tariffs on cheap imported wool rags rose by 140%. 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.
Smoot-Hawley's Lessons for Today
As part of his campaign, President Donald Trump advocated for a return to trade protectionism. Upon his election, he immediately withdrew from the Trans-Pacific Partnership, the biggest trade agreement since the North American Free Trade Agreement. He then renegotiated NAFTA with Mexico and Canada.
Trump initiated a trade war by announcing a 25% tariff on steel. It alienated allies such as the European Union, Japan, and China. These countries announced retaliatory measures.
Protectionism would have an even more devastating effect in modern times than it did in 1929. Exports now comprise 12.1% of U.S. GDP. The United States exports a lot of oil, commercial aircraft, food, and automobiles. These industries will suffer a great deal from a Smoot-Hawley trade war.
The Smoot-Hawley Act was as a bill to raise tariffs for the ailing agricultural community. But it ended up as a law raising tariffs to protect industries in all economic sectors. It became a product of self-interest groups that wanted to protect their own industries.
The U.S. Senate called it “among the most catastrophic acts in congressional history.” It:
· Sparked retaliatory trade wars that increased import prices.
· Caused international trade to drop by 65% between 1929 and 1934.
· Forced both U.S. exports and imports to decline dramatically, which crippled industries.
· Upped the ante of economic suffering for people who lived at the time of the Great Depression.
Today’s global economy is one of increasing interdependence. Smoot-Hawley demonstrated that U.S. trade protectionism would devastate its own and the world’s economy as well. As an economic superpower, the United States has a responsibility to formulate policies that fairly benefit its trading partners.
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