The Great Depression Lesson About ‘Trade Wars’ - HISTORY

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In 1930, raising tariffs across the board hurt the U.S. economy.

President Donald Trump has tweeted that “trade wars are good, and easy to win.” But many economists have disagreed that raising tariffs sharply can improve the economy. In particular, experts have pointed to the failure of the Smoot-Hawley Tariff Act, passed in June 1930, to protect U.S. industries with tariff increases.

Although this came several months after the stock market crash of 1929, the U.S. hadn’t yet entered “the full onset of the Great Depression,” says Claude Barfield, a resident scholar at the American Enterprise Institute. The thinking among Congress and President Herbert Hoover was that by raising taxes on thousands of imports no matter what country they came from, the act would protect American farmers and secure the nation’s economy. But experts disagreed.

Smoot-Hawley Act

A political cartoon showing President Herbert Hoover explaining his farm relief program to a farmer. The relief program is shown as a straw scarecrow scaring off hard times depicted as birds. (Credit: MPI/Getty Images)

“Economists around the country argued to the Republican Congress that this would only hurt the world economy, and the United States economy,” Barfield says. (Before the political parties realigned in the mid-20th century, the Democrats were the “free trade” party.)

And they were right. Although it did not cause the onset of the Great Depression, it did help extend it. After President Hoover signed the bill into law, stocks dropped to 140.

Other countries responded to the United States’ tariffs by putting up their restrictions on international trade, which just made it harder for the United States to pull itself out of its depression. Imports became largely unaffordable and people who had lost their jobs could only afford to buy domestic products. Global trade tanked 65 percent.

In effect, the Smoot-Hawley Tariff Act “prolonged [the depression] and possibly deepened it around the world, not just in the United States but for other countries,” he says.

Ultimately, this influenced the country’s long-term trade policies. Beginning with the Reciprocal Trade Agreements Act of 1934, and continuing with other acts throughout the century, the United States began to negotiate trade policies individually with countries, instead of imposing unilateral tariffs across the board.

Ffloor traders checking the stock prices on ticker tape at the New York Stock Exchange, taken in New York City, 1938. (Credit: University of New Hampshire/Gado/Getty Images)

Floor traders checking the stock prices on ticker tape at the New York Stock Exchange, taken in New York City, 1938. (Credit: University of New Hampshire/Gado/Getty Images)

America used relief from tariffs as a bargaining chip. “What we would do was to say to a country, ‘if you lower your tariffs on such and such, we will lower our tariffs,’” Barfield says. “So you had then a whole group of reciprocity agreements negotiated in between 1935 and 1941.”

The premise was that negotiating deals with other countries to reduce tariffs promotes economic growth. Since 1945, both Republican and Democratic presidents have mostly sought to lower trade barriers and negotiate reciprocity agreements. Those efforts have been reflected in the General Agreement on Tariffs and Trade, the World Trade Organization and the North American Free Trade Agreement

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