By Vaibhav Tandon

Measures announced so far this year have pushed the effective U.S. tariff rate above 20%.  The astonishing jump has raised import taxes to a level not seen in about a century. Such a milestone invites a review of the last time the U.S. shook the world with high tariffs. We should all hope that history does not repeat itself.

U.S. President Herbert Hoover ran for office in 1928 calling for tariffs to shield farmers from imports.  Efforts to provide that protection ultimately led to the Smoot-Hawley Tariff Act of 1930, which went beyond agriculture to include all U.S. industries.  The act raised duties on over 20,000 imports by an average of 20%.  The risks of escalation prompted over 1,000 economists across the U.S. sign on to a letter urging the President to veto the bill, but to no avail.

Indeed, America’s actions were met with prompt countermeasures. Canada, then as now America’s key trade partner, responded by imposing countervailing duties on American goods while lowering import taxes on goods arriving from the British Empire.  Several other countries including Australia, France, Italy, Mexico, and Switzerland also imposed punitive tariffs on American goods. 

Upon ratification of the Smoot-Hawley Act, international commerce collapsed, plummeting 65% over the following five years.  From 1929 to 1932, U.S. trade with Europe declined by two-thirds, and American exports to retaliating nations fell by about one-third over the same time period. 

The Smoot-Hawley tariff did not cause the Great Depression.  The downturn was triggered by a massive stock market crash that resulted in a wave of bank failures; tight monetary conditions added to the malaise.

But there is no denying that trade war was instrumental in exacerbating hardship for Americans.  Tariff-induced price increases and resultant decline in demand had a destabilizing impact on financial markets.  The U.S. stock market had already suffered significant losses in the year before Smoot-Hawley was enacted.  The duties not only accelerated the decline in equities, but also delayed the recovery for years. 

The effects were not merely commercial.  International cooperation on non-trade issues also weakened, especially on common defense.  Germany felt the sting from the trade war and had further difficulty repaying its reparations from World War I.  This created the conditions that gave rise to the Third Reich. 

The motivations behind Smoot-Hawley resemble today’s headlines, but the global economy does not.  The world is far more interconnected today than it was a century ago, in all respects.  Trade accounted for just 16% of global goods output in the 1930s, but has grown to 60% in 2023.  Trade’s importance to the U.S. economy has increased from just 5% of gross domestic product (GDP) in 1930 to 25% of GDP now.  The U.S. ships about $3 trillion a year worth of goods and services to the world, supporting over 40 million American jobs.

This would make the tariff war far more damaging, with long-term implications for global supply chains and companies’ manufacturing footprints.  Businesses are likely to face production delays and higher costs, which will ultimately be passed on to consumers.  A trade war makes the economy less efficient and adds to economic uncertainty, a recipe for lower investment.  

Smoot-Hawley tariffs should serve as a lasting warning of perils of protectionism, which creates economic instability and impairs international cooperation.  Alas, history is about to repeat itself as tariffs have a new champion in the White House.