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The Smoot-Hawley Tariff Act: How Protectionism Exacerbated the Great Depression

Chart of U.S equities after the Smoot-Hawley Tariff Act was signed.

The Great Depression and the role of trade policies

AH, The Smoot-Hawley Tariff Act. A prime example of how protectionist policies can have unintended consequences.

It was the 1930s, and things were looking pretty grim. While many factors contributed to the severity of this economic downturn, one policy decision stands out for making things even worse: the infamous Smoot-Hawley Tariff Act.

So, grab some popcorn and join us on this journey as we explore how this well-intentioned, but ultimately disastrous, piece of legislation turned a bad situation into an even greater calamity.

The Smoot-Hawley Tariff Act: Raising import tariffs

Our story begins with two ambitious US politicians, Senator Reed Smoot and Representative Willis C. Hawley.

They thought they had found a brilliant solution to protect American businesses from foreign competition.

Their brainchild, the Smoot-Hawley Tariff Act of 1930, significantly increased import tariffs on a wide range of goods, with the aim of safeguarding American jobs and boosting domestic production. Sounds good, right? Well, not quite.

The Act and Its Immediate Effects

The Smoot-Hawley Tariff Act significantly raised import duties on over 20,000 goods, with the average tariff rate increasing from 38.5% to 59.1%.

As a result, U.S. imports fell by 40% within two years. Economist Thomas Sowell once said, "When goods don't cross borders, soldiers will."

This quote underscores the economic tensions created by protectionist policies, which can lead to political conflicts.

A prime example of the negative consequences of the Smoot-Hawley Tariff Act is its impact on trade relations between the United States and Canada.

Following the enactment of the tariffs, Canada experienced a 75% decline in exports to the United States.

The Canadian economy, heavily reliant on trade with its southern neighbor, was severely affected, with unemployment rising from 4.2% in 1929 to 19.3% by 1933.

Retaliation and the Global Impact

In response to the Smoot-Hawley Tariff Act, many countries, including Canada, retaliated by imposing their own tariffs on American goods.

This led to a downward spiral in global trade, with world trade falling by 66% between 1929 and 1934.

U.S. exports dropped by 61% during the same period, further exacerbating the Great Depression.

President Franklin D. Roosevelt, reflecting on the Act's impact, said, "I have no hesitation in stating that the Smoot-Hawley Tariff Act... was a disastrous venture in the field of international trade and that it has been one of the potent factors in our present economic distress."

This quote highlights the general consensus among economists and policymakers that the Smoot-Hawley Tariff Act worsened the Great Depression.

Lessons learned and the importance of free trade

As the dust settled and the world emerged from the Great Depression, it became clear that protectionism wasn't the answer.

The global community recognized the value of free trade and worked together to establish a new international trade framework.

Institutions like the World Trade Organization (WTO) and agreements like the General Agreement on Tariffs and Trade (GATT) were born, promoting trade liberalization and reducing trade barriers.

So, what can we learn from the Smoot-Hawley Tariff Act and its role in exacerbating the Great Depression?

For one, protectionism might sound like a good idea in theory, but it can have devastating consequences in practice.

It's crucial for countries to work together, embrace free trade, and avoid the mistakes of the past.

After all, nobody wants to go through another Great Depression.

Trust me, once was more than enough.

In the future, traders can watch out for terrible policies like this, and turn it into a positive outcome. One way could've been by:

Short-selling stocks of companies that would be hurt by the tariffs:

If a trader believed that a particular company would be negatively impacted by the Smoot-Hawley Tariff Act, they could bet against that company's stock by short-selling it.

Short-selling involves borrowing shares of stock from someone else and selling them with the hope of buying them back later at a lower price, thereby profiting from the difference.

In conclusion, dear reader, we hope you've enjoyed this little trip down memory lane and learned a thing or two about the perils of protectionism.

As we continue to navigate the complex world of global economics, let's keep the lessons of the Smoot-Hawley Tariff Act in mind and work towards a future of open markets, international cooperation, and economic prosperity for all.

Always remember "Those who cannot remember the past are condemned to repeat it." - George Santayana

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