President Donald Trump famously claims that “trade wars are good and easy to win.” However, many economists have contested the idea that sharply increasing tariffs can strengthen the economy. One key example is the failure of the Smoot-Hawley Tariff Act, enacted in June 1930, which was intended to shield U.S. industries from tariff hikes but instead had the opposite effect.
Though the stock market had crashed the previous year, the United States had not yet fully entered the Great Depression, according to Claude Barfield, a scholar at the American Enterprise Institute. At the time, President Herbert Hoover and Congress believed that by raising taxes on imports regardless of their origin, the act would protect American farmers and stabilize the U.S. economy. However, many economists disagreed.
Barfield notes that economists across the country warned the Republican-led Congress that this move would harm not only the global economy but also the U.S. economy. (Back then, the Democrats were considered the party favoring free trade.)
Their predictions turned out to be accurate. While the Smoot-Hawley Tariff did not trigger the Great Depression, it likely contributed to its duration and severity. After Hoover signed the bill into law, stock prices plummeted to 140.
In retaliation, other nations imposed their own trade restrictions, exacerbating the U.S. economic struggle. With imports becoming prohibitively expensive, unemployed Americans could only afford domestic products. This led to a 65% decline in global trade.
The Smoot-Hawley Act, therefore, not only prolonged the Great Depression, but potentially deepened its global impact, according to Barfield.
The aftermath of this failure led to a shift in U.S. trade policy. In 1934, the Reciprocal Trade Agreements Act marked the beginning of a new approach, one focused on negotiating trade deals with individual countries rather than applying broad tariffs. Over the years, the U.S. used tariff relief as a bargaining tool.
Barfield explains, “We would tell a country, ‘If you lower your tariffs on certain goods, we’ll do the same.'” This approach led to a series of reciprocity agreements negotiated between 1935 and 1941.
The underlying idea was that lowering tariffs through negotiated agreements would foster economic growth. Since the end of World War II, both Republican and Democratic administrations have largely supported reducing trade barriers through such agreements, which were embodied in the General Agreement on Tariffs and Trade (GATT), the World Trade Organization (WTO), and the North American Free Trade Agreement (NAFTA).
