Friday, 17 June 2011

The Smoot-Hawley Tariff Act

On the 17th June 1930, U.S. President Herbert Hoover signed the infamous Smoot-Hawley Tariff Act into law. Not a great day for the U.S., or the rest of the worlds, economic well being.

Interestingly on May 4, 1930, 1,028 economists signed a petition urging Congress and President Herbert Hoover to reject the Smoot-Hawley Tariff Act, arguing that "increased restrictive duties would . . . operate, in general, to increase the prices which domestic consumers would have to pay." Neither Congress nor the president listened. And the rest is, as they say, history.

As Douglas Irwin has written in the Wall Street Journal:
The Smoot-Hawley tariff, conceived as a Republican ploy to gain the farm vote in the 1928 election, was a bad idea from the start. A tariff could not help farmers cope with low prices because most of them depended on exports. The nation sold one-half of its cotton, one-third of its tobacco, and one-fifth of its wheat and flour abroad. Their prices were set on the world market. The farmers who did compete against imports -- sugar and wool -- were already protected with high duties.

And once politicians opened the door to duties on farm goods, the result was a log-rolling, pork-barrel free for all in which the interests of consumers and exporters were ignored. When Colorado demanded a higher tariff on animal hides, Massachusetts, home of the shoe industry, insisted on a higher tariff on leather shoes.

Every congressman had some producer interests he wanted to protect. For Utah's Sen. Reed Smoot it was sugar beets. [...]

More than a thousand American economists signed a petition against the tariff bill. Prominent journalist Walter Lippmann criticized it as "a wretched and mischievous product of stupidity and greed." No matter. Proponents such as New York Republican Congressman Frank Crowther pooh-poohed fears of reprisals and claimed the tariff would "raise the standard of American labor and American wages."

While most economists do not hold the Smoot-Hawley tariff responsible for the Great Depression itself, it contributed to a sharp decline in world trade. The tariff slashed U.S. dutiable imports by about 15%, for example. Even worse, it spawned protectionism abroad.

America's trading partners, notably Canada, did not turn the other cheek. Outraged at being kicked out of the U.S. market, the pro-American Canadian government retaliated against U.S. exports. Anti-American sentiment allowed the pro-British Conservatives to win a general election there just weeks after the tariff took effect. They retaliated again.

To illustrate the blowback: U.S. imports of eggs from Canada dropped to 8,000 dozen from 13,000 dozen after Smoot-Hawley. But U.S. egg exports to Canada dropped to 14,000 dozen from 920,000 dozen as a result of Canada's retaliation.

Canada also led the charge to create a trade bloc within the British Empire that discriminated against U.S. goods. As a result, U.S. exports fell faster than U.S. imports during the Depression, even though the slump was more severe in the U.S. than elsewhere. There were other adverse political effects. The tariff helped ruin Cuba's sugar economy, which led to the overthrow of Cuba's pro-American government.
Yes people, tariffs really are dumb!

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