Smoot-Hawley Tariff Act

The Smoot-Hawley Tariff Act (sometimes known as the Hawley-Smoot Tariff Act) [ch. 497, USStat|46|590, June 17, 1930, "see" usc|19|1654] was an act signed into law on June 17 1930, that raised U.S. tariffs on over 20,000 imported goods to record levels. In the United States 1,028 economists signed a petition against this legislation, and after it was passed, many countries retaliated with their own increased tariffs on U.S. goods, and American exports and imports plunged by more than half. In the opinion of most economists, the Smoot-Hawley act was partially responsible for the severity of the Great Depression. [Milton Friedman, "Free to Choose", 1979] [ [http://future.state.gov/when/timeline/1921_timeline/smoot_tariff.html Smoot-Hawley Tariff] , U.S. Department of State.]

Congressional sponsors

The act was pioneered by Senator Reed Smoot, a Republican from Utah, and Representative Willis C. Hawley, a Republican from Oregon. President Herbert Hoover had asked Congress for a downward revision in rates, but Congress raised rates instead. While many economists urged a veto, Hoover signed the bill. When running for president in 1928, one of Hoover's many campaign promises to help beleaguered farmers had been to raise tariff levels on agricultural products.

Causes

It has been argued that Smoot-Hawley was an attempt by the Republican Party to deal with the problem of overcapacity that plagued the U.S. economy in the 1910s and 1920s, which was the result of extremely-high-throughput, continuous-flow mass production and, in agriculture, the widespread efficiency gains brought on by the use of farm tractors. Although "rated" capacity had increased tremendously, actual output, income, and expenditure had not. Under the direction of Senator Reed Smoot of Utah, the party drafted the Fordney-McCumber tariff act in 1921 with an eye to increasing domestic firms' market share. Weakening labor markets in 1927 and 1928 prompted Smoot to propose yet another round of tariff hikes. In his memoirs, Smoot made it clear:

"The world is paying for its ruthless destruction of life and property in the World War and for its failure to adjust purchasing power to productive capacity during the industrial revolution of the decade following the war."Merill, Milton 1990, Reed Smoot: Apostle in Politics, Logan UT: Utah State Press. p. 340.]

Opponents

A petition was signed by 1028 economists in the United States asking President Hoover to veto the legislation, organized by Paul Douglas, Irving Fisher, James TFG Wood, Frank Graham, Ernest Patterson, Henry Seager, Frank Taussig, and Clair Wilcox. ["The New York Times", 5 May 1930). Special to "The New York Times"— [http://www.clubforgrowth.org/media/uploads/smooth%20hawley%20ny%20times%2005%2005%2030.pdf "1,028 Economists Ask Hoover To Veto Pending Tariff Bill": Professors in 179 Colleges and Other Leaders Assail Rise in Rates as Harmful to Country and Sure to Bring Reprisals] .] Automobile executive Henry Ford spent an evening at the White House trying to convince Hoover to veto the bill, calling it "an economic stupidity". [ [http://www.time.com/time/magazine/article/0,9171,960038,00.html "Shades of Smoot-Hawley"] , "Time" magazine, October 7, 1985.] J. P. Morgan's chief executive Thomas W. Lamont said he "almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot tariff." [Ron Chernow, House of Morgan, p.323, 1990]

Retaliation

Retaliation began long before the bill was enacted into law in June 1930. As it passed the House of Representatives in May 1929, boycotts broke out and foreign governments moved to raise rates against American products, even though rates could be moved up or down in the Senate or by the conference committee. In all, 34 formal protests were lodged with the Department of State from foreign countries.Fact|date=October 2008

In May 1930, Canada preemptively imposed new tariffs on 16 products that altogether accounted for around 30% of U.S. exports to Canada. [Wilson B. Brown and Jan S. Hogendorn. "International Economics: In the Age of Globalization". Retrieved from http://www.google.com.au/books?id=5SoP6KUDwY4C&pg=PA246&dq=smoot+hawley&sig=GplUGJBCti3Tv3XN2saPicP5Lsw.] Canada later also forged closer economic links with the British Commonwealth. France and Britain protested and developed new trade avenues. Germany developed a system of autarky. Imports plunged 66% from US$4.4 billion (1929) to US$1.5 billion (1933), and exports fell 61% from US$5.4 billion to US$2.1 billion, both drops far more than the 50% fall in the GDP.

Economic effects

There is no universal agreement about the effect of the tariff. According to the U.S. Statistical Abstract, the effective tariff rate was 13.5% in 1929 and 19.8% in 1933 with 63% of all imports being duty-free. From 1821 through 1900 the United States averaged 29.7% effective tariff rates and peaked in 1830 at 57.3% with only 8% of all imports being duty-free, dwarfing the Smoot-Hawley rate. In addition, imports in 1929 were only 4.2% of the United States' GNP and exports were only 5.0%. Smoot-Hawley's effect on the entire U.S. economy may have been small, compared to the monetary policy of the Federal Reserve System. By 1937 the effective tariff rate was reduced to 15.6% when the reaction of 1937-1938 occurred, demonstrating no statistical correlation between this economic downturn and tariff levels. Senator Robert L. Owen testified at the hearings on HR 7230, the bill to make the Federal Reserve banks a national property, that; "In 1937, when the Federal Reserve Board called upon the banks to raise their reserves to twice what they had been before, there was a contraction of credit of two billion dollars. [Eustace Mullins, "The Federal Reserve Conspiracy",1971, p.122]

Using panel data estimates of export and import equations for 17 countries, Jakob B. Madsen (2002) estimated the effects of increasing tariff and non-tariff trade barriers on worldwide trade during the period 1929–1932. He concluded that real international trade contracted somewhere around 33% overall. His estimates of the impact of various factors included about 14% because of declining GNP in each country, 8% because of increases in tariff rates, 5% because of deflation-induced tariff increases, and 6% because of the imposition of nontariff barriers.

The Smoot-Hawley Tariff Act "imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the United States", 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 a factor in causing the crash, the recession that began in late 1929, or both, and its eventual passage a factor in deepening the Great Depression. ["How the Republicans Caused the Stock Market Crash of 1929" by Bernard Beaudreau: [http://www.google.com.au/books?id=zOeWjD9ka5oC&pg=PA78&dq=smoot+hawley+caused+stock+market+crash&sig=r2V-TYFgGsP_t5te4A5HSDQTJ9s] ] 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. [Source: U.S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1957 (Washington, D.C., 1960), p.70.]

End of the tariffs

As a result of the Smoot-Hawley Tariff and other countries' responses to it, the world after World War II saw a push towards multilateral trading agreements that would prevent a similar situation from unfolding. This led to the Bretton Woods Agreement, in 1944, a great lessening of global tariffs starting in December 1945, and the General Agreement on Tariffs and Trade, in the 1950s. [ [http://www.wto.org/English/thewto_e/whatis_e/tif_e/fact4_e.htm "Understanding the WTO: The GATT years: from Havana to Marrakesh"] , wto.org]

However, the American Tariff League Study of 1951 which compared the effective tariff levels of 43 countries found that only 7 countries had a lower tariff level than the United States (5.1%).11 countries had effective tariff rates higher than the Smoot-Hawley peak of 19.8% including the United Kingdom (25.6%). The 43 country average was 14.4% - 0.9% higher than the U.S. level of 1929.

In addition to tariffs, many countries implemented non-tariff barriers to protect their industries in the aftermath of WW II after experiencing the dangers of dependence on imports for vital supplies brought upon by free trade policies. Many nations felt the ill effects of embargoes, naval blockades and submarine warfare upon their national security. An example of this involved Britain and France importing all of their watches and clocks from Switzerland and Germany prior to World War II. They discovered that the lack of a watch industry was a great handicap in building defense equipment during the war. Both nations determined never to be without a watch industry again and placed embargoes on watch imports after WW II. [Lewis E. Lloyd, Tariffs: The Case For Protection, 1955, p. 137-139]

Non-tariff barriers would become more important in the post-WW II reconstruction period. Japan for example, with an effective tariff rate of 1.6% in 1951 would put many non-tariff barriers in place. In June 1952 Japan's "Basic Policy for the Introduction of Foreign Investment into Japan's Passenger Car Industry" placed quotas, tariffs and commodity taxes on imports that closed the Japanese automobile market to American manufacturers for nearly two decades. [Eugene J. Kaplan, Japan: The Government-Business Relationship, Bureau of International Commerce, February 1972, p.111-112] Japan would also make extensive use of licensing agreements which would transfer foreign technology to Japan in exchange for limited market access as in the case of the U.S. television industry. With Japan's home market protected, Japanese manufacturers could make large profits at home to off-set the cost of selling their goods at reduced prices in foreign markets (dumping).

Presence in modern political dialogue

In the discussion leading up to the passage of the North American Free Trade Agreement (NAFTA) then Vice-President Al Gore mentioned the tariff as a response to NAFTA objections voiced by Ross Perot during a debate in 1993 they had on the "Larry King Show". He gave Perot a framed picture of Smoot and Hawley shaking hands after its passage.Fact|date=July 2008

In popular culture

In the 1986 film "Ferris Bueller's Day Off", the economics teacher, played by Ben Stein (whose father, Herbert Stein, was an economics professor and economic advisor to the U.S. government), is seen teaching his class about the Hawley-Smoot Tariff Act.

In comedian Dave Barry's tongue-in-cheek American history book, , he repeatedly mentions the Hawley-Smoot Tariff throughout the book, not for its historical merit but merely as a humorous phrase. He continues to reference it, occasionally with fake subtlety (e.g., "The H*****-S**** T*****") long after he believes the reader no longer finds it funny.

ee also

*International trade
*Protectionism

References

Bibliography

*cite journal |last=Archibald |first=Robert B. |authorlink= |coauthors=Feldman, David H. |year=1998 |month= |title=Investment During the Great Depression: Uncertainty and the Role of the Smoot-Hawley Tariff |journal=Southern Economic Journal |volume=64 |issue=4 |pages=857–879 |doi=10.2307/1061208 |url= |accessdate= |quote=
*cite book |title=Making Sense of Smoot-Hawley: Tariffs and Technology |last=Beaudreau |first=Bernard C. |authorlink= |coauthors= |year=2005 |publisher=iUniverse |location=New York |isbn= |pages=
*cite book |title=The Great Betrayal: How American Sovereignty and Social Justice Are Being Sacrificed to the Gods of the Global Economy |last=Buchanan |first=Patrick J. |authorlink= |coauthors= |year=1998 |publisher=Little ↦ Brown |location=Boston |isbn=0316115185 |pages=
*cite journal |last=Crucini |first=Mario J. |authorlink= |coauthors= |year=1994 |month= |title=Sources of variation in real tariff rates: The United States 1900 to 1940 |journal=American Economic Review |volume=84 |issue=3 |pages=346–353 |doi=10.2307/2118081 |url= |accessdate= |quote=
*cite journal |last=Crucini |first=Mario J. |authorlink= |coauthors=Kahn, James |year=1996 |month= |title=Tariffs and Aggregate Economic Activity: Lessons from the Great Depression |journal=Journal of Monetary Economics |volume=38 |issue=3 |pages=427–467 |doi=10.1016/S0304-3932(96)01298-6 |url= |accessdate= |quote=
*cite book |title=Opening America's Market: U.S. Foreign Trade Policy since 1776 |last=Eckes |first=Alfred |authorlink= |coauthors= |year=1995 |publisher=University of North Carolina Press |location=Chapel Hill |isbn=0585029059 |pages=
*cite journal |last=Eichengreen |first=Barry |authorlink= |coauthors= |year=1989 |month= |title=The Political Economy of the Smoot-Hawley Tariff |journal=Research in Economic History |volume=12 |issue= |pages=1–43 |id= |url= |accessdate= |quote=
*cite journal |last=Irwin |first=Douglas |authorlink= |coauthors= |year=1998 |month= |title=The Smoot-Hawley Tariff: A Quantitative Assessment |journal=Review of Economics and Statistics |volume=80 |issue=2 |pages=326–334 |doi= |url= |accessdate= |quote=
*cite book |title=American Trade Policy: 1923-1995 |last=Kaplan |first=Edward S. |authorlink= |coauthors= |year=1996 |publisher=Greenwood Press |location=London |isbn=0313294801 |pages=
*cite journal |last=Madsen |first=Jakob B. |authorlink= |coauthors= |year=2001 |month= |title=Trade Barriers and the Collapse of World Trade during the Great Depression |journal=Southern Economic Journal |volume=67 |issue=4 |pages=848–868 |doi=10.2307/1061574 |url= |accessdate= |quote=
*cite journal |last=McDonald |first=Judith |authorlink= |coauthors=O'Brien, Anthony Patrick; Callahan, Colleen |year=1997 |month= |title=Trade Wars: Canada's Reaction to the Smoot-Hawley Tariff |journal=Journal of Economic History |volume=57 |issue=4 |pages=802–826 |doi=10.2307/2951161 |url= |accessdate= |quote=
*cite book |title=Reed Smoot: Apostle in Politics |last=Merill |first=Milton |authorlink= |coauthors= |year=1990 |publisher=Utah State Press |location=Logan, UT |isbn=0874211271 |pages=
*cite encyclopedia |last=O'Brien |first=Anthony |year= |title=Smoot-Hawley Tariff |encyclopedia=EH Encyclopedia |publisher= |location= |id= |url=http://www.eh.net/encyclopedia/article/obrien.hawley-smoot.tariff
*cite book |title=Congress and the Politics of U.S. Foreign Economic Policy, 1929–1976 |last=Pastor |first=Robert |authorlink= |coauthors= |year=1980 |publisher=University of California Press |location=Berkeley |isbn=0520039041 |pages=
*cite book |title=Politics, Pressures and the Tariff |last=Schattschneider |first=E. E. |authorlink= |coauthors= |year=1935 |publisher=Prentice-Hall |location=New York |isbn= |pages= → Classic study of passage of Hawley-Smoot tariff
*cite book |title=The Tariff History of the United States |last=Taussig |first=F. W. |authorlink= |coauthors= |edition=8th edition |year=1931 |publisher=G.P. Putnam's Sons |location=New York |isbn= |pages= |url=http://www.mises.org/etexts/taussig.pdf
*cite book |title=Lessons from the Great Depression |last=Temin |first=Peter |authorlink= |coauthors= |year=1989 |publisher=MIT Press |location=Cambridge, MA |isbn=0262200732 |pages=
*cite book |title=Tariffs and Trade in U.S. History: An Encyclopedia |last=Turney |first=Elaine C. Prange |authorlink= |coauthors=Northrup, Cynthia Clark |year=2003 |publisher= |location= |isbn= |pages=

External links

*—The text of the law as it still stands (United States Code, Title 19, Chapter 4)
* [http://eh.net/encyclopedia/article/obrien.hawley-smoot.tariff Article on the Smoot-Hawley Tariff from EH.NET's Encyclopedia] by economic historian Anthony O'Brien
* [http://www.state.gov/r/pa/ho/time/id/17606.htm Smoot-Hawley Tariff page] on the United States Department of State website
* [http://www.ncpa.org/oped/bartlett/oct2999.html Opinion] on the role of the Tariff in the Great Depression from the National Center for Policy Analysis