Commentary Type

Does Trump Want a Trade War?


What You Need to Know about Smoot-Hawley Tariffs and the 1930s

Chad P. Bown (PIIE) and Douglas A. Irwin (PIIE)


"Trade wars are good, and easy to win," according to President Trump. He plans to slap tariffs on steel and aluminum on March 23, and punitive duties on $30 billion to $60 billion of imports from China are also reportedly in the offing.

Trump's statements bring to mind the infamous Smoot-Hawley tariffs and the "trade wars" that accompanied the Great Depression of the 1930s. The Smoot-Hawley Act, signed into law on June 17, 1930, applied to hundreds of products and bumped the average US tariffs from 38 percent to 45 percent. The global economy sank into an unprecedented slump and trade wars broke out. However, the relationship among these events is not as simple as commonly portrayed.

Here are five things you need to know about the Smoot-Hawley tariff, the fallout in the 1930s, and implications for today.

1) No, Smoot-Hawley tariffs did not cause the Great Depression—or vice versa

Economists date the Great Depression from August 1929, a turning point when the economy started to shrink. The US stock market began its epic slide in October 1929, losing almost half of its value by mid-November.

Smoot-Hawley wasn't a response to the recession. It was first conceived in 1928, when the American economy was still growing and had full employment. The House of Representatives passed its version of the bill in May 1929.

Smoot-Hawley also did not cause the Great Depression. President Hoover did not sign it into law until June 1930. The tariffs went into effect almost a year after the economic downturn had begun. Most economists believe the recession became the Great Depression when the US banking system began to collapse toward the end of 1930.

How does this compare to Trump's proposal for tariffs today? Like then, there's no macroeconomic crisis prompting Trump's tariffs—US unemployment is at 4.1 percent, and the economy has been growing for nearly nine years. The US economy seems unlikely to go into a recession on March 24—although the OECD has warned that trade protectionism poses a risk to global growth.

2) The initial imposition of tariffs was less damaging than their later effects

At the time of the Smoot-Hawley tariffs, the US government applied duties to about two-thirds of imports in "per unit" form. This might be $100 per ton of steel or $1 per pound of cheese.

This mattered a lot because of the significant price deflation at the time.

With deflation, a tariff that increased the cost of an import by 10 percent—a $100 tariff on one ton of steel originally priced at $1,000—suddenly felt like a 20 percent tariff when steel prices fell to $500 per ton. Even though the government only legislated one tariff increase, falling prices meant that duties became increasingly restrictive over time.

Today, only about 8 percent of US tariffs remain in per unit form—and price deflation isn't an imminent concern.

However, Trump's opening round of tariffs could introduce other problems. For example, the new tariffs may lead to job losses in steel-using industries. American Keg Co.—the last US manufacturer of stainless steel beer kegs—already announced layoffs and said that its own demands for tariffs may be forthcoming because of the anticipated higher steel prices. Because steel and aluminum are such important inputs, their higher costs could lead to cascading protectionism.

In addition, other countries could raise their own steel and aluminum tariffs—this happened after President George W. Bush imposed tariffs on steel in 2002—to prevent the deflection of trade in such products to their market.

3) Some countries raised tariffs to directly retaliate against the United States

Several countries immediately responded to Smoot-Hawley with their own tariffs in the early 1930s. Canada, then as now, was heavily dependent on the US market and outraged by the US action—and imposed retaliatory duties twice in 1930. While other countries struck back at the United States as well, a global trade war did not break out until 1931—and then largely because of a financial crisis in Europe.

Trading partners today also may respond by imposing higher tariffs on US exports. In light of Trump's duties, the European Union announced a plan to "rebalance" its trading relationship.

Others may act similarly. China announced it was investigating whether to impose new tariffs on more than $1 billion of imports of sorghum shortly after Trump imposed an earlier round of tariffs on solar panels and washing machines in January.

4) Trading partners formed blocs—and excluded the United States

Smoot-Hawley also left the United States out of preferential trade arrangements. At a conference in Ottawa in 1932, Britain established its system of "imperial preferences," granting lower tariffs to former colonies like Canada. Before Smoot-Hawley, about one-quarter of US exports had gone to Britain and Canada.

This meant US wheat farmers faced tariffs in the British market—while Canadian farmers enjoyed imperial preferences. And the US textile industry also faced tariffs on exports to Canada that Britain's manufacturers avoided.

A similar pattern seems to be emerging today. The European Union recently signed deals with Canada and Japan. Eleven Pacific Rim countries are also on track to implement a modified version of the Trans-Pacific Partnership that Trump rejected.

As a result, the Maine lobster industry is worried about losing access to Europe, as Canadian competitors now face zero tariffs. Out West, US cattle ranchers face tougher conditions in the Japanese market because Australian beef receives a lower tariff.

5) In 1934, Congress delegated US trade policy leadership to the president

Partly in response to the problems Smoot-Hawley created, Congress passed the Reciprocal Trade Agreements Act of 1934. Over the next seven decades, US presidents have used that legal authority to negotiate tariff reductions with partners and to liberalize trade.

Congress also delegated considerable authority to the president to increase tariffs over this period. Until the Trump administration, however, this rarely led to new import protection.

Trump's steel and aluminum tariffs are arising under national security provisions of Section 232 of the Trade Expansion Act of 1962. His reported tariffs on $30 billion to $60 billion of imports from China would be imposed after an investigation conducted under Section 301 of the Trade Act of 1974, a separate statute that gives the president such authority.

Consequently, some congressional Republicans have introduced legislation trying to halt some of Trump's tariffs. The big question now is whether Congress will try to take back the reins of trade policy that it handed over to the president in 1934.

Chad P. Bown is a senior fellow at the Peterson Institute for International Economics and cohost of the Trade Talks podcast (@ChadBown). Douglas A. Irwin (@D_A_Irwin) is professor of economics at Dartmouth College, senior fellow at the Peterson Institute, and author of Trade Policy Disaster: Lessons from the 1930s (MIT Press, 2012) and Peddling Protectionism: Smoot-Hawley and The Great Depression (Princeton University Press, 2011).

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