Did Smoot-Hawley Bring Ragnarok?
Anytime an American politician of any stripe contemplates trade restrictions, the immediate riposte goes something like Ronald Reagan’s: “How many times does it have to be repeated that the Smoot-Hawley tariff helped bring on the Great Depression before the protectionists will back off?”
The quote refers to Public Law 71–361, aka the Tariff Act of 1930, also known commonly by its spookier sounding name of Smoot-Hawley. Congress passed this Act in June 1930, by mostly party-line votes in the House and Senate.
Was the Act the economy- and world-destroying event that observers claim? Recent scholarship suggests the story is more complicated.
In his new book “Clashing Over Commerce,” economist Doug Irwin reviews 254 years of American and colonial trade history in 832 pages of detail. His conclusion:
the Hawley-Smoot tariff itself was not a response to the Great Depression. Preparation for tariff revision began in late 1928, well before the stock market crash [of October 1929], the slide in industrial production, and the increase in unemployment. Although the economic decline following the business-cycle peak in August 1929 probably made the Senate more favorable to the tariff legislation in early 1930, the recession was still relatively mild at this point. The slump intensified after a banking panic in late 1930, a tightening of monetary and financial conditions in late 1931, and a continued economic slide through much of 1932, and it culminated in a severe banking crisis in early 1933.
Because the Depression followed so closely on the heels of the tariff increase, many people at the time believed that the Hawley-Smoot tariff was responsible for the economic disaster. However, as in the case of previous downturns, the consensus among economic historians is that monetary and financial factors were the dominant cause of the Great Depression.
Nor was Smoot-Hawley an “all-time high” in tariffs. Irwin finds that the average tariff was 35.7 percent before the act, and 41.1 percent after — a 15 percent increase. While this was substantial, rates had been higher at many times in U.S. history. Indeed, the economist argues that these rates were little more than a reversal to the Republican norms before President Woodrow Wilson pushed for a slashing of rates as his first act in office in 1913.
Likewise, trade was a relatively small share of the economy at the time. Even though the value of U.S. exports and imports fell nearly 70 percent between 1929 and 1932, this was on a small base. Relative to national income, exports contracted from 5% to 2.7%, while imports went from 3.8% to 2%. In contrast to these relatively low amounts, overall GDP (consisting mostly of workers’ consumption) collapsed 25 percent.
In comparative cross-country terms, Smoot-Hawley was also not an aberration. Political scientist John Conybeare, in his study of trade wars over several millenia, finds…
Protection increased markedly after World War I, for both domestic and international bargaining reasons. Delle Donne (1928: 92–89) discusses some of these factors: [government] revenue needs, postwar nationalism (including the need to maintain militarily important industries), the postwar economic crisis (especially with regard to industries that had been created or expanded during the war, and needed protection in order to survive the peace), and the formation of new countries, which not only increased the number of trade barriers, but also their magnitude, since most new states attempted to stimulate industrial development through protection (e.g. Czechoslovakia). Currency devaluations also provoked offsetting increases in tariffs…
[By Smoot-Hawley, even the free trade that existed] was already breaking down on its own… The League of Nations [which the U.S. never joined] sponsored World Economic Conferences of 1927, 1929, and 1930, all of which attempted and failed to get effective action to remove non-tariff barriers (such as quotas) and refrain from tariff increases. By the time of the 1930 conference only a few small countries that clearly benefited from multilateral free trade (Denmark, the Netherlands, and Norway) and Britain, still adhering to its free trade ideology, supported the goal of tariff reductions.
Just because Smoot-Hawley didn’t cause Ragnarok doesn’t mean it was a particularly good idea.
First, the Act’s statutory trade-restricting effects were amplified by exogenous macroeconomic factors (e.g. financial panic and the UK’s decision to go off the gold standard). This caused a further 30 percent increase in effective rates. Under U.S. trade law at that time and before, the majority of imports were subject to so-called “specific duties.” These latter rates are calculated not as a percentage of the value of a given import (like 5% on $1 of value), but a fixed amount per quantity (5 cents per pound). As products’ value plummets in a depression, the tariff burden skyrockets. (The reverse had happened in World War I, when the effective rate dropped to 16 percent — the lowest rate since 1792.) All these factors combined to make Smoot-Hawley’s burden on importers more severe that Congress anticipated. (Since that time, policymakers have sharply reduced the number of tariffs that are “specific” rather than “ad valorem.”) So, even if Smoot-Hawley wasn’t the cause of depresssion, it wasn’t the cure either.
Second, Smoot-Hawley exacerbated already frayed U.S. alliances. To be fair, economic historian Al Eckes’s trade history book “Opening America’s Market” finds that formal retaliation directly-targeted-at-the-US and announced-as-such was rare. In part, this is because, as he notes, the U.S. had relatively few trade treaties, so there was little basis for formal diplomatic protests. But this formalistic take misses subtler effects. Irwin’s book documents how Canadian nationalists were able to oust an incumbent free trade government just weeks after the Act was passed, promising a tough response. This wasn’t isolated, as Spain and others also followed. Irwin adds that:
In Europe, the reaction to the American tariff “was disapproval — immediate, undisguised, and unanimous,” as Bidwell (1930, 130) reported. The European press and public opinion, industry and agricultural groups, government officials, and business leaders were appalled by the action. In their view, the world’s largest creditor nation, with a substantial trade surplus, was needlessly restricting the exports of countries that were desperately trying to pay off their burdensome World War I debts. The world’s leading economic power — a country that had enjoyed robust economic growth through the 1920s while Europe struggled with postwar reconstruction — had just significantly increased its tariffs for no justifiable reason after having already raised duties in 1922. And the United States had not only refused to join the League of Nations, but it was now undermining the League’s efforts to negotiate a multilateral tariff truce. These were some of the reasons behind the European resentment that greeted the US action…
as the Great Depression spread around the world, purely domestic considerations probably would have led to higher tariffs in other countries even if Congress had not passed the Hawley-Smoot tariff. However, because the United States was one of the first to raise its tariffs as the Depression intensified, it signaled a breakdown in policy discipline and a wave of tariff increases in other countries soon followed, even if they were not directed specifically against the United States.
Indeed, this research suggests the link of Smoot-Hawley to increased nationalism in the pre-World War II probably outweighed its direct contribution to the Great Depression.
Smoot-Hawley’s biggest legacy was changing the trade debate. If it didn’t exist, we’d have to invent it: it’s incomparable as a policy image to forestall backsliding into protectionism, even if the historical record is murkier than the image suggests.
Smoot-Hawley also led to a reexamination of which branch and agency of government was best suited to do trade policy. While the constitutional norm and practice had always been for Congress to take the lead, the 1930s saw a major shift of power from the legislative to the executive branch, where it has stayed ever since. While there remain sound political arguments for Congress at least setting the contours of trade, Smoot-Hawley was a bad use of Congress’ time, taking 18 months to finalize. For an extended stretch, the whole of the Senate was going through the tariff rates line-by-line for 3,330 goods. Not a model of efficient policymaking.
As a consequence of that experience, the push for “depoliticization” of trade continued. In Irwin’s recounting, progressives had succeeded by 1916 in convincing a reluctant President Wilson to allow an independent Tariff Commission (today’s ITC) to conduct fact-finding exercises. By the 1920s, the Commission was given gradually more enforcement powers, and Smoot-Hawley extended this power still further. Here’s Eckes:
after Congress had completed its work on the tariff bill, the State Department and U.S. envoys abroad shrewdly deflected foreign criticism and encouraged dissatisfied parties to file petitions seeking review under the flexible tariff provision. Under this authority — section 336 — the Tariff Commission and the president could adjust tariff rates. Indeed, Secretary Stimson told the Italian ambassador that the commission would prove to be a “new and almost revolutionary instrument of government.”
Most foreign governments accepted Hoover’s assurances that the flexible tariff provision afforded an opportunity to adjust individual inequities away from the spotlight of full Senate consideration. Most of all, this process avoided the disruption of retaliation and ensuing strains on political relations.
Being able to punt responsibility across branches and agencies allowed the U.S. to credibly claim to foreign powers that its hands were tied whenever the odd protectionist measure came to the fore, thereby balancing the domestic and international politics while maintaining an overall openness to trade.
Moreover, by raising tariffs, Smoot-Hawley gave Roosevelt and later administrations something to bargain about for the next several decades. Up until that point, the U.S.’ trade strategy was to keep tariffs high, but apply them fairly uniformly among its various trade partners. This allowed the government to claim that it was not playing favorites (i.e. was treating each country as a “most-favored nation”), and then free-ride on lower-tariff European allies (who would reciprocate MFN to any country that gave them MFN). As Conybeare writes, this “may be regarded as a successful example of hegemonic predation that probably raised the national income of the United States by obtaining tariff concessions from the rest of the world without being obliged to offer concessions on U.S. tariffs.” He finds that, while the tactics changed after 1934, the strategy remained the same for decades to come. After Smoot-Hawley, U.S. presidents could approach weaker trading partners one-by-one, getting concessions that benefited U.S. exporters, without being forced to give up much that hurt domestic producers. This gave the U.S. lots of running room to get the benefits of trade before taking on tougher negotiations and before the costs of trade became more apparent. By then, roll-back itself became politically and economically costly.