Tariffs, retaliation and a lesson from 1930: how America is repeating the Smoot–Hawley disaster

Any historian could have foreseen the disruption now beginning in global shipping and trade. It’s the direct result of America’s punitive and economically indefensible tariffs against just about every country in the world — as well as its port penalties against Chinese-built and Chinese-operated ships.

But nobody asked the historians.

And now we’re running into trouble that looks uncomfortably like the 1930s and the fallout from the Smoot–Hawley Act, which slapped a wall of punitive tariffs — effectively taxes — on imports into the United States.

One of Washington’s worst policy mistakes, Smoot–Hawley deepened, spread and prolonged the Great Depression. It devastated international commerce and created misery for ordinary people.

Nearly a century later — despite American leaders once vowing never to repeat the error — Trump’s so-called “Day of Liberation” tariffs and port penalties are disrupting global trade all over again. They are raising the price of goods that Americans rely on and will, in time, reduce their availability.

What the tariffs are doing — and why the president is wrong

First, the price of thousands of products is rising in America because, contrary to the president’s claims, it’s US importers who pay the tariffs — not the exporters. Trump is wildly wrong to say that the US Treasury is collecting “trillions” from other nations.

Second, American exporters are now being hit by retaliation. Beijing has begun imposing its own port penalties on US-flagged ships. In mid-October, for instance, the German owners of the container ship Matson Waikiki were ordered to pay US$1.7 million for docking in Shanghai. This is precisely the same tit-for-tat, beggar-thy-neighbour pattern seen in the 1930s.

Third, American ports will soon see shipping diverted elsewhere — for example, to Canadian ports where rail can take over. It’s already happening.

And fourth, major manufacturers are simply going where the welcome is warmer. China’s BYD, for instance, has abandoned plans for a huge American plant in favour of building one in Brazil.

In short, America is shooting itself in the foot.

The 1930s déjà vu — and what Smoot–Hawley really caused

This is very nearly a re-run of the 1930s. Reed Smoot, an obstinate senator from Utah, believed local farmers were being hurt by agricultural imports. With Congressman Charles Hawley, he crafted the infamously protectionist Smoot–Hawley laws — passed despite the pleas of 1,000 far more rational economists.

The consequences were catastrophic. As I wrote in The Great Crash, “the lifting of rates on dutiable imports into the United States to the highest levels in more than a century effectively erected a blockade around the home markets.” Soon the ratio of duties collected to the value of imports hit 60 percent.

This was exactly what Smoot and Hawley wanted — but, predictably, other countries retaliated. Global trade collapsed by two-thirds between 1929 and 1934. The prices of wheat, cotton, tin, rubber, sugar, coffee and countless other commodities plummeted. Producers everywhere were ruined — including in America, where exporters of wheat, cotton, tobacco and lumber lost up to half their markets. At one point, sawdust sold for more per ton than wheat.

Across the United States the damage was appalling. Steel production slumped to 12 percent of capacity. Railroad freight — a key indicator of economic activity — fell by a third. Automobile production halved. And as export markets vanished, vessels were abandoned to rust at moorings around the world.

The lesson America still hasn’t learned

Smoot had obviously never read Adam Smith. In The Wealth of Nations (1776), Smith showed that tariffs, import quotas and protectionist policies raise prices for consumers, limit choice, and reduce a country’s standard of living.

And here we go again. One can only hope America comes to its senses before today’s downward spiral gathers speed.

Incidentally, despite overwhelming evidence that his policies were disastrous, Smoot never changed his mind.

Read more of my stories in the History Repeats series →