Lessons on Free Trade From the Great Depression

COMMENTARY Trade

Lessons on Free Trade From the Great Depression

Aug 9th, 2016 5 min read
COMMENTARY BY

Former Jay Van Andel Senior Policy Analyst in Trade Policy

Bryan served as an advocate for free trade through his research at The Heritage Foundation.

With all the talk going on about the merits of free trade and the U.S.’s free trade agreements, it might be helpful to look at an example from the past. Debates over free trade vs. protectionism are nothing new, and politicians can learn a thing or two about the downfalls of protectionist tariffs from Depression-era U.S. trade policy.

In 1930, Congress passed what is now known as the Smoot-Hawley tariff. The act was supposed to raise tariffs on agricultural imports to cater to the U.S. farm sector, but by the time the bill got through both chambers of Congress, 890 tariffs on all kinds of goods were increased.

In a matter of weeks, 1,028 economists from across the country signed a letter requesting that President Herbert Hoover veto the “iniquitous” tariff act. This response from the economic community was unprecedented; there were nearly as many signatures as there were universities at the time.

Signees included professors whose ideas are still taught to economics students today, like Irving Fisher, Frank Taussig, and Paul Douglas. They warned that tariffs would not only “increase the prices which domestic consumers would have to pay,” but also “inevitably provoke other countries to pay us back in kind by levying retaliatory duties against our goods.”

After Hoover signed the law, prices on dutiable goods rose significantly (especially since most tariffs were rated by volume as opposed to percentage back then, meaning that deflation hit imports even harder). Over 20 countries threatened the U.S. with retaliatory tariffs and our largest trading partner at the time, Canada, raised tariffs on 30 percent of U.S. exports.

Although modern economists may disagree over the extent to which the Smoot-Hawley tariff exacerbated the Great Depression, it is certainly clear that it did not help. Smoot and Hawley both lost their subsequent elections, and the tariff wars of the 1930s damaged international relations leading into World War II.

Modern economists, just like their 1930s counterparts, agree on the benefits of free trade and the disadvantages of protectionism. Hopefully politicians will pay more attention now than they did in the 1930s. A copy of the letter from those 1,028 economists warning about the dangers of protectionist tariffs follows:

The undersigned American economists and teachers of economics strongly urge that any measure which provides for a general upward revision of tariff rates be denied passage by Congress, or if passed, be vetoed by the President.

We are convinced that increased protective duties would be a mistake. They would operate, in general, to increase the prices which domestic consumers would have to pay. By raising prices they would encourage concerns with higher costs to undertake production, thus compelling the consumer to subsidize waste and inefficiency in industry. At the same time they would force him to pay higher rates of profit to established firms which enjoyed lower production costs. A higher level of protection, such as is contemplated by both the House and Senate bills, would therefore raise the cost of living and injure the great majority of our citizens.

Few people could hope to gain from such a change. Miners, construction, transportation and public utility workers, professional people and those employed in banks, hotels, newspaper offices, in the wholesale and retail trades, and scores of other occupations would clearly lose, since they produce no products which could be protected by tariff barriers.

The vast majority of farmers, also, would lose. Their cotton, corn, lard, and wheat are export crops and are sold in the world market. They have no important competition in the home market. They can not benefit, therefore, from any tariff which is imposed upon the basic commodities which they produce. They would lose through the increased duties on manufactured goods, however, and in a double fashion. First, as consumers they would have to pay still higher prices for the products, made of textiles, chemicals, iron, and steel, which they buy. Second, as producers, their ability to sell their products would be further restricted by the barriers placed in the way of foreigners who wished to sell manufactured goods to us.

Our export trade, in general, would suffer. Countries can not permanently buy from us unless they are permitted to sell to us, and the more we restrict the importation of goods from them by means of ever higher tariffs the more we reduce the possibility of our exporting to them. This applies to such exporting industries as copper, automobiles, agricultural machinery, typewriters, and the like fully as much as it does to farming. The difficulties of these industries are likely to be increased still further if we pass a higher tariff. There are already many evidences that such action would inevitably provoke other countries to pay us back in kind by levying retaliatory duties against our goods. There are few more ironical spectacles than that of the American Government as it seeks, on the one hand, to promote exports through the activity of the Bureau of Foreign and Domestic Commerce, while, on the other hand, by increasing tariffs it makes exportation ever more difficult. President Hoover has well said, in his message to Congress on April 16, 1929, “It is obviously unwise protection which sacrifices a greater amount of employment in exports to gain a less amount of employment from imports.”

We do not believe that American manufacturers, in general, need higher tariffs. The report of the President’s committee on recent economics changes has shown that industrial efficiency has increased, that costs have fallen, that profits have grown with amazing rapidity since the end of the war. Already our factories supply our people with over 96 percent of the manufactured goods which they consume, and our producers look to foreign markets to absorb the increasing out- put of their machines. Further barriers to trade will serve them not well, but ill.

Many of our citizens have invested their money in foreign enterprises. The Department of Commerce has estimated that such investments, entirely aside from the war debts, amounted to between $12,555,000,000 and $14,555,000,000 on January 1, 1929. These investors, too, would suffer if protective duties were to be increased, since such action would make it still more difficult for their foreign creditors to pay them the interest due them.

America is now facing the problem of unemployment. Her labor can find work only if her factories can sell their products. Higher tariffs would not promote such sales. We can not increase employment by restricting trade. American industry, in the present crisis, might well be spared the burden of adjusting itself to new schedules of protective duties.

Finally, we would urge our Government to consider the bitterness which a policy of higher tariffs would inevitably inject into our international relations. The United States was ably represented at the World Economic Conference which was held under the auspices of the League of Nations in 1927. This conference adopted a resolution announcing that “the time has come to put an end to the increase in tariffs and move in the opposite direction.” The higher duties proposed in our pending legislation violate the spirit of this agreement and plainly invite other nations to compete with us in raising further barriers to trade. A tariff war does not furnish good soil for the growth of world peace.

This piece originally appeared in The Daily Signal