Are Tariffs an Answer to International Competition?
Tariffs have historically been used by governments to raise revenues and protect domestic production. The current post-WW II era has seen a gradual reduction in the use of tariffs. The last time the US used general tariffs was with the 1930 Smoot-Hawley Tariff Act. This act was an attempt to protect US farms and businesses from foreign competition. The Smoot-Hawley Tariff Act of 1930, enacted to protect American industries by raising import duties, had several significant unintended consequences.
Retaliation and the Collapse of International Trade
This is arguably the most significant unintended consequence. The US, being a major global trading partner, saw its trading partners retaliate swiftly and aggressively by imposing their own tariffs on American goods. Countries like Canada, Great Britain, France, and Germany, among many others, raised their tariffs in response. This led to a dramatic decrease in international trade. Some estimates suggest that global trade plummeted by as much as 65% between 1929 and 1934. This collapse in trade hurt American exporters, particularly farmers who relied on international markets for their surplus production.
Deepening the Great Depression
While the Smoot-Hawley Tariffs didn’t cause the Great Depression (which had already begun with the stock market crash of 1929), most economists agree that they significantly worsened and prolonged it. By reducing international trade, the tariffs limited markets for American goods, leading to decreased production, business failures, and increased unemployment. Simultaneously, the higher cost of imported goods reduced consumer purchasing power.
Agricultural Crisis
Although the Act was partly intended to protect American farmers, it ended up exacerbating their problems. As other countries retaliated with tariffs on agricultural products, American farm exports declined sharply. This further depressed already low agricultural prices, contributing to farm foreclosures and rural poverty.
Bank Failures
The decline in international trade and the overall economic downturn contributed to bank failures, particularly in agricultural regions and those dependent on exports. Farmers who couldn’t sell their goods defaulted on loans, and businesses involved in international trade faced severe financial strain.
Rise in Economic Nationalism and Isolationism
The Smoot-Hawley Tariffs reflected and further fueled a sense of economic nationalism and isolationism in the United States. The focus on protecting domestic industries at all costs damaged international economic cooperation and made it more difficult for countries to work together to address the global economic crisis.
Damage to International Relations
The tariffs strained diplomatic relations between the US and its trading partners. The perception of the US engaging in protectionist policies created resentment and distrust, hindering future international cooperation on economic and political issues.
Food for Thought
It’s worth noting that even at the time, over a thousand economists signed a petition urging President Hoover to veto the bill, warning of its negative consequences. Their predictions, unfortunately, proved to be largely accurate.
The Smoot-Hawley Tariffs serve as a stark historical example of how well-intentioned protectionist policies can lead to significant unintended negative consequences, particularly in an interconnected global economy. They underscore the importance of considering the broader international implications of domestic economic decisions.
As Mark Twain said: