by Lynda Bryant-Work
As President Donald Trump rolls out more and more tariffs and trade partners are angered – the warnings of the 1930 Smoot-Hawley Tariff Act are ignored by the administration.
Most Americans have not heard of the legislation and have no conception of how disastrous it was, as once again the pendulum swings from free trade to protectionism. The tariff act is a story and piece of history of a bill going off the rails, off a cliff and helping sink the world economy.
Senator Reed Smoot, Republican Mormon from Utah, and the powerful chairman of the Senate Finance Committee, appeared to have something to prove – patriotism. Some decades earlier, he survived a four-year Senate investigation questioning his fitness to serve in the U.S. Senate. It was nothing less than the Watergate of its time.
But the Tariff Act of 1930 gave Smoot, along with Oregon Congressman Willis Hawley, co-sponsor of the bill and chair of the of the House Ways and Means Committee, what they considered a chance to protect the nation, but landed them in a rather dubious place in history.
In the 19th and early 20th century, it was not unusual for patriotism and protectionism to be coupled in American politics, according to Dough Irwin, author of “Peddling Protectionism: Smoot-Hawley and the Great Depression.” Smoot was out to protect domestic sugar beets, a business at the heart of the Mormon economy.
Smoot’s answer was a higher tariff that would protect American sugar from foreign competition. According to Irwin, he used the very nativist philosophies of the time. But the Smoot-Hawley Tariff Act proved that bad economics can happen to the best of intentions. The pair drafted a tariff bill in Washington, which made for very good politics and very bad economics.
In 1929, American farmers were struggling, but the problem was not foreign competition; it was depressed agriculture prices that tariffs would not solve. Crop prices were lower after World War I, and the government initially tried to help farmers through price supports, but that was a new idea. So the government viewed tariff as sort of an indirect way of helping out farmers by stopping imports of farm goods.
Add to the problems, the Republican party at the time controlled both chambers of Congress and the White House, and politicians were concerned about winning the Midwestern farm vote.
The Tariff Act turned into a big protectionist feeding frenzy. Congress began holding hearings on tariffs in 1929, at which point all kinds of lobbyists and industry groups showed up to piggyback on the farm tariffs.
Suddenly there were many tariffs on various products including ball bearings, steel, textiles, shoes, bricks, collapsible tubs, bottle caps, sprinkler tops, and even the goldfish industry. In all, the Tariff Act increased nearly 900 import duties.
The congressional logrolling began as House members agreed to vote for one another’s tariffs and the bill passed and moved to the Senate. In the Senate, Smoot took the stage, going so far as to wanting to restrict the import of what he considered explicit books, including D.H. Lawrence’s “Lady Chatterley’s Lover.” Smoot didn’t approve of smut.
As the legislation progressed, newspaper columnists and the nation’s economists became increasingly alarmed, warning the tariffs would raise the cost of living, limit exports as other countries retaliated, injure U.S. investors since high tariffs would make it harder for foreign debtors to repay loans, as well as damage foreign relations.
At least 1,028 economists sent a letter of protest, arguing that protectionism would harm the economy and cause a trade war. But Congress dismissed their warnings and President Herbert Hoover ignored his key economic adviser.
Hoover signed the bill 18 months after deliberations began, and at the early beginnings of the Great Depression. The stock market was in a shamble after crashing and the world economy was sagging. It didn’t take long for America’s biggest trading partners to retaliate.
Canada struck first after Smoot-Hawley raised the tariff on a dozen Canadian eggs from 8 cents to 10 cents. It backfired on the egg producers and started the snowball rolling down the hill on all other goods.
So, exactly what was the damage from the Tariff Act?
According to American Trade Policy, other countries retaliated, and world trade shrank enormously. By the end of 1934 world trade had plummeted by some 66 percent from the 1929 level. Response to the tariff internationally became a domestic problem that required a reaction from each country.
The Spanish tariff, Italian automobile tariff, Swiss boycott and Canadian tariff were direct retaliations against Smoot-Hawley that seriously reduced world trade. Great Britain reacted to the initial trade collapse caused by Smoot-Hawley by restricting its own trade.
Figures from the Foundation for Economic Education showed U.S. iron and steel exports decreased 85.5 percent by 1932 due to retaliation by Canada. European retaliation raised tariffs so high that U.S. exports declined from $541 million per year to $97 million by 1933, an 82 percent drop.
From 1929 to 1933 American exports declined from about $5.2 billion to $1.7 billion, and the impact was concentrated on agricultural products such as wheat, cotton and tobacco. As a result, many American farmers defaulted on their loans, which in turn particularly affected small rural banks.
Two years later its signing, unemployment had reached almost 24 percent in the U.S., more than 5000 banks had failed, and hundreds of thousands were homeless and living in shanty towns called “Hoovervilles”.
Economic woes spread around the world, although other countries weren’t hit as hard; while U.S. unemployment rates increased some 600 percent, unemployment in Great Britain rose some 130 percent and over 200 percent in France and Germany.
President Ronald Reagan in a talk with an audience at the Commonwealth Club in San Francisco, 35 years ago this month, told the gathering that:
“There’s a great hue and cry for us to bend to protectionist pressures. Well, I’ve been around long enough to remember that when we did that once before in this century, something called Smoot-Hawley, we lived through a nightmare. World trade fell by 60 percent, contributing to the Great Depression and to the political turmoil that led to World War II.”
As with other tariff issues in the past, the warnings continue to be ignored, even though Ferris Bueller’s economics teacher, (Ben Stein), tried to inculcate the risks with his class.
In March 2002, President George W. Bush imposed a 30 percent tariff on Chinese steel. The results were chaotic. In a report put out by Consuming Industries Trade Action Coalition in February of that year, was noted the tariffs against China boosted the overall prices of steel and cost the U.S. 200,000 jobs in businesses that buy steel, representing $4 billion in lost wages.
George Wilhelm Friedrich Hegel once stated, “We learn from history that we do not learn from history,” and that quote seems appropriate as more announcements on tariffs come from the White House.