Smoot-Hawley Tariff Act Totally Explained

Everything about The Smoot-hawley Tariff Act totally explained

The Smoot-Hawley Tariff Act (sometimes known as the Hawley-Smoot Tariff Act) was an act signed into law on June 17, 1930, that raised U.S. tariffs on over 20,000 imported goods to record levels. Many countries retaliated with their own increased tariffs on U.S. goods, and American exports and imports plunged by more than half. Some economists and historians have argued that the act contributed to the severity of, or even caused, the Great Depression.

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. Hoover had, during the 1928 campaign, pledged to help beleaguered farmers by, among other things, raising 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. 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."

Opponents

One thousand twenty-eight economists in the United States, organized by Paul Douglas, Irving Fisher, James TFG Wood, Frank Graham, Ernest Patterson, Henry Seager, Frank Taussig, and Clair Wilcox, signed a petition asking President Hoover to veto the legislation (New York Times, 5 May 1930) Automobile executive Henry Ford spent an evening at the White House trying to convince Hoover to veto the bill, calling it "an economic stupidity."

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 United States 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.
In May 1930, Canada preemptively imposed new tariffs on 16 products that altogether accounted for around 30% of U.S. exports to Canada. 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 two thirds from $4.4 billion (1929) to $1.5 billion (1933), and exports fell from $5.4 billion to $2.1 billion—in both cases, far more than the 50% fall in Gross Domestic Product.

Economic effects

There isn't 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. From 1821 through 1900 the United States averaged 29.7% effective tariff rates and peaked in 1930 at 57.3%, dwarfing the Smoot-Hawley rate. In addition, imports in 1929 were only 4.2% of the United States' gross national product (GNP). (This doesn't include the effect of other countries' retaliatory tariffs on U.S. exports.) Smoot-Hawley's effect on the entire U.S. economy may have been small, compared 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 during the period 1929–1932. He concluded that real international trade contracted by about 14% because of declining GNP in each country; by 8% because of increases in tariff rates; by 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 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 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. 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.

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.

Popular culture

In the 1986 movie Ferris Bueller's Day Off, Ben Stein, as a dry high school economics teacher, attempts to draw a parallel between Smoot-Hawley and 1980s-era Reaganomics.
In the discussion leading up to the passage of NAFTA Vice President Al Gore mentioned the tariff as a rejoinder to NAFTA objections voiced by Ross Perot during a debate in 1993 they'd on the Larry King show. He gave Perot a framed picture of Smoot and Hawley shaking hands after its passage.
Humor writer Dave Barry refers repeatedly to the act in his book, possibly because of its silly-sounding name .

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