A Case Study: Why 'Buy American' Will Make You Poorer
Representative Willis Hawley (left) and Senator Reed Smoot
With Great Depression comparisons littering the business press, the ghost of Smoot-Hawley is popping up everywhere. Smoot-Hawley, of course, is the 1930 trade legislation that has become a textbook case on how not to preserve American jobs and revive the U.S. economy.
Hoovernomics
During his 1928 presidential campaign, Herbert Hoover promised to help U.S. farmers by increasing tariffs on imported food. That was not enough for Senator Reed Smoot (R-Utah) and Congressman Willis Hawley (R-Ore.), who thought that the more protection, the better. Many industries agreed, and piled onto the proposed legislation, which eventually raised tariffs on 20,000 products in almost all sectors of the economy.
More than 1,000 economists signed a letter all but begging Hoover to veto the bill. Although Hoover had grave reservations about it, he caved to his party — the Republicans were the more ardent protectionists in this era — and Smoot-Hawley became law in June, 1930.
Skeptics of the dismal science might be tempted to assume that when 1,000 economists agree on anything, the wonks are probably wrong. This time, however, they were tragically right. All of the country’s major trading partners promptly retaliated, raising their own tariffs on U.S. exports and on exports in general. Imports to the U.S. fell, as the legislation intended, but exports fell even more. The U.S., by setting off a round of what is known as “beggar-thy-neighbor” policies (an excellent phrase to toss off), hurt itself most of all. World trade declined by two-thirds from 1929 to 1934, when Smoot-Hawley, as well as previous tariff legislation, was finally rolled back.
The Consequences
Smoot-Hawley had other effects as well. Congress had begun dithering about tariffs in 1929, which worried the markets enormously. And because stocks are bought and sold in anticipation of the future, the specter of Smoot-Hawley contributed to the market dive of late 1929-30. Moreover, the legislation poisoned international relations at a time when trust and cooperation among free nations, in particular, would have been darn useful: Hitler came to power in 1933.
No, of course Smoot-Hawley was not responsible for Nazism. It didn’t even cause the Great Depression — that was the fault of monetary policy. Smoot-Hawley is probably best seen as a consequence of economic fear, rather than the basis for it. But in an economic downturn, it makes no sense to, in effect, raise taxes and slow down growth. High tariffs do both those things by raising the cost of goods and by choking off exports
There is a lively debate among economic historians about how important Smoot-Hawley was in terms of the Depression, with a determined minority saying that it didn’t matter much because exports were a relatively small share (less than 7 percent of GDP) of the U.S. economy at the time. But the spillover effects of bad policy can be substantial, and most people consider Smoot-Hawley a textbook case of a bad idea at the worst possible time.
“It had a lot to do with prolonging the Great Depression,” argues Daniel Ikenson, associate director of the Center for Trade Policy Studies at the Cato Institute, a libertarian think tank that favors free trade. “It was a catalyst for tit-for-tat protectionism.”
President Obama seems to agree. He recently told a Canadian audience, “If you look at history, one of the most important things during a worldwide recession of the sort we’re seeing now is that each country does not resort to beggar-thy-neighbor policies — protectionist policies, that can end up further contracting world trade.”
Give that man a round of applause.