Smoot/Hawley, Protectionism and Recessions

On June 17th, 1930, Congress passed the Smoot Hawley Tariff act. This was done mere months after black Monday had started what was then a recession and ultimately turned into the Great Depression. While quantifying the impact of this tariff is difficult, there is at this point no debate that this act perpetuated a difficult economic situation and made it worse. Some historians and economist go so far as to put the blame squarely on Smoot/Hawley for turning a mere recession into a depression.

There is not universal agreement as to the impact of the tariff. According to the U.S. Statistical Abstract, the effective tariff rate was 13.5% in 1929 and 19.8% in 1933. From 1821 through 1900 the United States averaged 29.7% effective tariff rates and peaked in 1830 at 57.3%, dwarfing the Smoot-Hawley rate. In addition, imports in 1929 were only 4.2% of America's Gross National Product (GNP) (although this does not include the effect of other countries' retaliatory tariffs on US exports). Smoot-Hawley's impact on the entire U.S. economy was dwarfed in comparison to the monetary policy of the Federal Reserve System.

Using panel data estimates of export and import equations for 17 countries, Jakob B. Madsen (2002) estimated the effects of increasing tariff and nontariff trade barriers on worldwide trade over the period 1929 to 1932. He included not just Hawley-Smoot but the tariff increases in other countries as well. He concluded that real international trade contracted by around 14% because of declining GNP in each country; 8% from increases in tariff rates; 5% because of deflation-induced tariff increases; and an extra 6% because of the imposition of nontariff barriers.

Smoot-Hawley Tariff Act "imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the U.S.," quadrupling previous tariff rates.
Although the tariff act was passed after the stock-market Crash of 1929, many economic historians consider the political discussion leading up to the passing of the act as a factor in causing the crash and/or the recession that began in late 1929, and its eventual passage as a factor in deepening the Great Depression.[3]Unemployment was at 7.8% in 1930 when the Smoot-Hawley tariff was passed, but it jumped to 16.3% in 1931, 24.9% in 1932, and 25.1% in 1933.[2]

The Great Depression wasn't merely limited to the United States but wound up in one capacity or another being a world phenomenon. This act stunted free trade at the exact moment that free trade needed to be a a driving force in countering the economic slowdown. The failure of Smoot Hawley should be a warning to all of what happens when protectionist policies are enforced when the world is going through an economic downturn.

It is unclear just how severe the current economic downturn will be. It may still not be that severe at all. It is, however, clear that the economic downturn is being felt world wide. The latest data has GLOBAL sub prime losses at 215 billion dollars.

Subprime-related losses at global financial institutions have so far totaled as much as $215 billion, with about 55 percent of that coming from the United States, the head of Japan's financial regulator said on Monday.

The estimates from Japan's Financial Services Agency (FSA) come after JPMorgan Chase & Co said in a report late on Friday Wall Street banks are facing a
"systemic margin call" that could deplete them of up to $325 billion in capital.

European losses totaled about 8 trillion yen ($78.5 billion), while Asia and Canada together accounted for about 1.4 trillion, FSA Chairman Takafumi Sato told reporters at a regular briefing.

Some of the roots of the Great Depression have to do with a lack of confidence in the banking system. The current mortgage meltdown also has some of those roots. At a time when the entire world has an economic downturn, industry needs every market that it can possibly be exposed to in order to turn things around. That is where free trade comes in. It gives industry just that outlet. Now more than ever, we must all do everything to promote free trade so that it once again acts as a driver to stimulate world wide economies.

This is important because again there are some politicians that want to inject protectionist free trade policies. These politicians seek to limit free trade with our immediate neighbors. They seek to limit free trade with Latin America, and with newfound allies like Colombia. Just like with Smoot Hawley, they seek to do this just as the economy is possibly heading into a recession. We need to only look at history to see the disastrous results of just such a policy.