Introduction
Now that Donald Trump has been reelected, I think it’s time to explain some of the history behind his proposals.
Understanding Tariffs
A tariff is a tax or duty imposed by a government on imported goods. The primary purpose of a tariff is to increase the cost of foreign products, making them less competitive compared to domestic products. Tariffs can serve multiple objectives, including generating revenue for the government, protecting domestic industries from foreign competition, and influencing trade policy.
There are two main types of tariffs: ad valorem tariffs and specific tariffs. Ad valorem tariffs are calculated as a percentage of the value of the imported goods. For example, a 10% ad valorem tariff on an imported product worth $100 would add $10 in tax. Specific tariffs, on the other hand, are imposed as a fixed fee based on the quantity of goods, such as a $5 tariff per unit of an item. Tariffs can impact consumer prices, trade volumes, and international relations.
History
The Smoot-Hawley Tariff Act was introduced in 1929 by Republican legislators as a response to the agricultural crisis of the 1920s. American farmers faced intense competition from foreign agricultural products, and many were struggling with declining prices. The idea of raising tariffs was seen as a way to protect domestic agriculture from foreign competition and stabilize the market.
In June 1930, President Herbert Hoover signed the act into law despite opposition from economists, business leaders, and foreign governments. The legislation raised tariffs on over 20,000 imported goods to historically high levels, leading to retaliatory measures from other countries.
Context for the Passage
The Smoot-Hawley Tariff Act was passed during a period of significant economic uncertainty. The United States was in the early stages of the Great Depression, and policymakers were seeking solutions to revive the economy. Protectionism, in the form of high tariffs, was seen as a potential remedy by many legislators who believed it would protect American jobs and industries from foreign competition.
However, the decision to increase tariffs was controversial. Many economists and business leaders warned that it would exacerbate the economic downturn by stifling international trade. The global economy was already fragile, and higher tariffs threatened to disrupt the flow of goods and deepen the economic crisis.
Specific Tariffs Imposed by the Smoot-Hawley Act
The Smoot-Hawley Tariff Act raised tariffs on thousands of imported goods. Below are some notable examples of the increased tariffs imposed by the legislation:
- Wool and Woolen Products: The tariff on raw wool was increased to 34 cents per pound, and woolen fabric faced tariffs of up to 60%. This was intended to protect domestic textile manufacturers but led to higher consumer prices.
- Sugar: The tariff on imported sugar was raised by approximately 40%, making foreign sugar less competitive against American producers.
- Agricultural Products: Tariffs on wheat increased to 42 cents per bushel, while oats saw a tariff increase to 15 cents per bushel. These measures aimed to support American farmers struggling with low crop prices.
- Industrial Goods: Tariffs on industrial products, including chemicals, glass, and iron, increased significantly, with some rates exceeding 50%. This was aimed at protecting American industries from foreign competition.
- Automobiles: The tariff on imported cars was raised to 25%, which was intended to protect the American automobile industry but led to decreased imports and strained international trade relations.
Economic Impact
The economic impact of the Smoot-Hawley Tariff Act was significant and largely negative. While the intention was to protect domestic industries, the act led to a sharp decline in international trade. Many countries retaliated by imposing their own tariffs on American goods, which reduced U.S. exports. The volume of global trade fell dramatically, contributing to a deeper and more prolonged economic depression.
The act is widely criticized by historians and economists as having worsened the Great Depression. By reducing trade, it limited the ability of countries to recover economically. The protectionist policies of the Smoot-Hawley Tariff Act are often cited as a cautionary example of the dangers of trade wars and isolationist economic policies.
Employment and Stock Market Data
The economic conditions during the passage of the Smoot-Hawley Tariff Act in June 1930 were already deteriorating due to the onset of the Great Depression. Below is a summary of employment and stock market data at the time of the act’s passage and when it was repealed:
At the Time of Adoption (June 1930)
- Unemployment rate: Approximately 8.7%, reflecting a significant increase as the Great Depression worsened.
- Stock market (Dow Jones Industrial Average): The Dow Jones was around 230 points in June 1930, having already lost a substantial portion of its value since the crash of 1929.
At the Time of Repeal (December 1934)
- Unemployment rate: Unemployment had peaked at around 25% in 1933 but had slightly declined to approximately 21.7% by late 1934. The economic recovery was slow and uneven.
- Stock market (Dow Jones Industrial Average): The Dow Jones had partially recovered from its lowest point in 1932 but was still only at about 104 points in December 1934, less than half of its value before the 1929 crash.
Date of Repeal
The Smoot-Hawley Tariff Act was effectively repealed by the Reciprocal Trade Agreements Act of 1934, which was signed into law on June 12, 1934. This new legislation aimed to reduce tariffs through bilateral trade agreements, marking a significant shift away from the protectionist policies of Smoot-Hawley.
References and Further Reading
- Text of the [Smoot-Hawley Tariff Act (Tariff Act of 1930)]: (https://www.govinfo.gov/content/pkg/USCODE-1930-title19/html/USCODE-1930-title19.htm)
- [Repeal of the Smoot-Hawley Tariff Act (Reciprocal Trade Agreements Act of 1934):] (https://www.govinfo.gov/content/pkg/USCODE-1934-title19/html/USCODE-1934-title19.htm)
- [Stock Market Data (Dow Jones Industrial Average History):] (https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart)
- [Employment Data (Historical U.S. Unemployment Rates):] (https://www.bls.gov/cps/cpsaat01.htm)
Note on Post Creation
I used ChatGPT to assist in the creation of this post. Nothing has been included that I do not personally understand is true.