Smoot–Hawley Tariff Act
|Long title||An Act To provide revenue, to regulate commerce with foreign countries, to encourage the industries of the United States, to protect American labor, and for other purposes.|
|Nicknames||Smoot-Hawley Tariff, Hawley-Smoot Tariff|
|Enacted by||the 71st United States Congress|
|Effective||March 13, 1930|
|Public law||Pub.L. 71–361|
|Statutes at Large||ch. 497, 46 Stat. 590|
The Tariff Act of 1930 (codified at 19 U.S.C. ch. 4), otherwise known as the Smoot–Hawley Tariff or Hawley–Smoot Tariff, was an act sponsored by Senator Reed Smoot and Representative Willis C. Hawley and signed into law on June 17, 1930, that raised U.S. tariffs on over 20,000 imported goods to record levels.
The dutiable tariff level (this does not include duty-free imports—see Tariff levels below) under the act was the highest in the U.S. in 100 years, exceeded by a small margin by the Tariff of 1828. The great majority of economists then and ever since view the Act, and the ensuing retaliatory tariffs by America's trading partners, as responsible for reducing American exports and imports by more than half. According to Ben Bernanke, "Economists still agree that Smoot-Hawley and the ensuing tariff wars were highly counterproductive and contributed to the depth and length of the global Depression." However, the general view is that while it had negative results, the Smoot-Hawley Tariff was not one of the main causes of the Great Depression because foreign trade was only a small sector of the U.S. economy.
Sponsors and legislative history
In 1922, Congress had passed the Fordney–McCumber Tariff act, which had increased tariffs on foreign imports.
The League of Nations' World Economic Conference met at Geneva in 1927, concluding in its final report: "the time has come to put an end to tariffs, and to move in the opposite direction." Vast debts and reparations could only be repaid through gold, services or goods; but the only items available on that scale were goods. However, many of the delegates' governments did the opposite, starting in 1928 when France passed a new tariff law and quota system.
As the global economy entered the first stages of the Great Depression in late 1929, the USA's main goal emerged to protect American jobs and farmers from foreign competition. Reed Smoot championed another tariff increase within the USA in 1929, which became the Smoot-Hawley Tariff Bill. In his memoirs, Smoot made it abundantly 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."
When campaigning for president during 1928, one of Herbert Hoover's promises to help beleaguered farmers had been to increase tariffs of agricultural products. Hoover won, and Republicans maintained comfortable majorities in the House and the Senate during 1928. Hoover then asked Congress for an increase of tariff rates for agricultural goods and a decrease of rates for industrial goods.
The House passed a version of the act in May 1929, increasing tariffs on agricultural and industrial goods alike. The House bill passed on a vote of 264 to 147, with 244 Republicans and 20 Democrats voting in favor of the bill. The Senate debated its bill until March 1930, with many Senators trading votes based on their states' industries. The Senate bill passed on a vote of 44 to 42, with 39 Republicans and 5 Democrats voting in favor of the bill. The conference committee then aligned the two versions, largely by moving to the greater House tariffs. The House passed the conference bill on a vote of 222 to 153, with the support of 208 Republicans and 14 Democrats.
In May 1930, a petition was signed by 1,028 economists in the U.S. 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. Automobile executive Henry Ford spent an evening at the White House trying to convince Hoover to veto the bill, calling it "an economic stupidity." J. P. Morgan's chief executive Thomas W. Lamont said he "almost went down on [his] knees to beg Herbert Hoover to veto the asinine Hawley-Smoot tariff."
Hoover opposed the bill and called it "vicious, extortionate, and obnoxious" because he felt it would undermine the commitment he had pledged to international cooperation. However, in spite of his opposition, Hoover yielded to influence from his own party and business leaders and signed the bill. Hoover's fears were well founded. Canada and other countries raised their own tariffs in retaliation after the bill had become law.
Threats of 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 increase rates against American products, even though rates could be increased or decreased by the Senate or by the conference committee. By September 1929, Hoover's administration had received protest notes from 23 trading partners, but threats of retaliatory actions were ignored.
In May 1930, the greatest trading partner, Canada, retaliated by imposing new tariffs on 16 products that accounted altogether for around 30% of U.S. exports to Canada. Canada later also forged closer economic links with the British Empire via the British Empire Economic Conference of 1932. France and Britain protested and developed new trade partners. Germany developed a system of autarky.
Both Reed Smoot and Willis Hawley were defeated for reelection in 1932, the depression had worsened for workers and farmers despite their promises of prosperity with a high tariff.
Historically, there has been confusion as to the actual tariff level imposed by the Smoot-Hawley Tariff. In the two volume series published by the U.S. Bureau of the Census entitled "The Historical Statistics of the United States, Colonial Times to 1970, Bicentennial Edition," tariff rates have been represented in two forms. On page 888, the first measure (series U211) is the "free and dutiable tariff rate" which is the tariff revenue divided by the dollar sum of both dutiable and non-dutiable imports. The second measure (series U212) is the "dutiable tariff rate" which is the tariff revenue divided by the dollar value of dutiable imports. The "dutiable tariff rate" peak of 1932 was 59.1%, second only to the 61.7% rate of 1830. However, in 1933, 63% of all imports were never taxed which the "dutiable tariff rate" does not reflect. The "free and dutiable rate" in 1929 was 13.5% and peaked under Smoot-Hawley in 1933 at 19.8% which is significantly below the 29.7% "free and dutiable rate" that the United States averaged from 1821 until 1900. By 1937 the "free and dutiable tariff rate" was reduced to 15.6% when the recession of 1937-1938 occurred demonstrating no correlation between tariff levels and the performance of the U.S. economy.
Coincident economic events
At first, the tariff seemed to be a success. According to historian Robert Sobel, "Factory payrolls, construction contracts, and industrial production all increased sharply." However, larger economic problems loomed in the guise of weak banks. When the Creditanstalt of Austria failed in 1931, the global deficiencies of the Smoot-Hawley Tariff became apparent.
U.S. imports decreased 66% from $4.4 billion (1929) to $1.5 billion (1933), and exports decreased 61% from $5.4 billion to $2.1 billion. Thus, net exports declined from $1 billion to $600 million, while GDP was $58.9 billion.
According to government statistics, U.S. imports from Europe decreased from a 1929 high of $1,334 billion to just $390 million during 1932, while U.S. exports to Europe decreased from $2,341 billion in 1929 to $784 million in 1932. Overall, world trade decreased by some 66% between 1929 and 1934.
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 non-tariff barriers.
The new tariff imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the United States, quadrupling previous tariff rates on individual items, but raising the average tariff rate to 19.2%, in line with average rates of that day.
Unemployment was at 8% in 1930 when the Smoot–Hawley tariff was passed, but the new law failed to lower it. The rate jumped to 16% in 1931, and 25% in 1932-33. However, these changes cannot be attributed to the law, since, as Douglas A. Irwin concludes from his large computer simulation study, "Smoot-Hawley ... probably did not contribute significantly to the economic downturn." It was not until WWII, during which "the American economy expanded at an unprecedented rate", that unemployment fell below 1930s levels.
Imports during 1929 were only 4.2% of the United States' GNP and exports were only 5.0%. Monetarists, such as Milton Friedman, who emphasize the central role of the money supply in causing the depression, note that the Smoot-Hawley Act only had a contributory effect on the entire U.S. economy.
End of the tariffs
In his 1932 election campaign platform Franklin Delano Roosevelt pledged to lower tariffs. He and the then-Democratic Congress did so in the Reciprocal Trade Agreements Act of 1934. As the name suggests, this allowed the President to negotiate tariff reductions on a bilateral basis, and also treated such tariff agreements as regular legislation, requiring a majority, rather than as a treaty that required a two-third vote. This set one of the core components of the trade negotiating framework that developed after World War II. The tit-for-tat responses of other countries were understood to have contributed to a sharp reduction of trade in the 1930s. After World War II this undergirded a push towards multi-lateral trading agreements that would prevent a similar situation from unfolding. While the Bretton Woods Agreement of 1944 focused on foreign exchange and did not directly address tariffs, those involved wanted a similar framework for international trade. President Harry S. Truman launched this process in December 1945 with negotiations for the creation of the International Trade Organization (ITO). As it happened, separate negotiations on the General Agreement on Tariffs and Trade (GATT) moved more quickly, with an agreement signed in October 1947; in the end, the US never signed the ITO agreement. Adding a multilateral "most-favored-nation" component to that of reciprocity, the GATT served as a framework for the gradual reduction of tariffs over the subsequent half century.
Post WW II Smoot-Hawley levels reflected a general tendency of the United States to unilaterally reduce its tariff levels while its trading partners retained their high levels. The American Tariff League Study of 1951 compared the free and dutiable tariff rates of 43 countries. It found that only seven nations had a lower tariff level than the U.S. (5.1%), while eleven nations had free and dutiable tariff rates higher than the Smoot-Hawley peak of 19.8% including the United Kingdom (25.6%). The 43-country average was 14.4% which was 0.9% higher than the U.S. level of 1929 demonstrating that few nations were reciprocating in reducing their levels as the U.S. reduced its own.
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 Smoot-Hawley 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.
- ch. 497, 46 Stat. 590, June 17, 1930, see 19 U.S.C. § 1654
- Taussig (1931)
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- Book Review The Great Depression; Blame game; Was legislation sponsored by two Republicans to blame? Mar 24th 2011 | from The Economist print edition