People jam the area around the New York Stock Exchange on Oct. 29, 1929. Workers flood the streets in a panic following the 'Black Tuesday' stock market crash on Wall Street. The crash prompted the Great Depression of the 1930s.
Calvin Sandborn, K.C., is a retired law professor who currently works on environmental and justice issues.
U.S. President Donald Trump’s tariffs, which he has repeatedly threatened but stopped short of implementing on Monday, constitute his biggest financial gamble since he bought and bankrupted Atlantic City casinos. And if enacted the results could again be dire.
Similar tariffs in 1930 destroyed global trade and intensified the Great Depression. The history of the Smoot-Hawley Tariff Act shows how Mr. Trump’s tariffs are likely to play out. In 1930, Utah senator Reed Smoot and Oregon representative Willis Hawley proposed a sharp increase in tariffs on a broad spectrum of goods, invoking many of the same arguments Mr. Trump uses today.
“This government should have no apology to make for reserving America for Americans … in economics as in politics, the policy of the government is, ‘America First,’” Smoot said.
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Their proposal alarmed economists, as more than a thousand petitioned then-president Herbert Hoover to veto the tariffs. Much like economists today, they warned tariffs would drive inflation, reduce the ability of other countries to buy U.S. goods and potentially tip the 1929 recession into a depression.
Many shared these concerns. For example, Henry Ford famously spent an evening at the White House, pleading with Hoover to veto this “economic stupidity.” But the president turned a deaf ear, and approved the 20-per-cent tariffs on thousands of imported goods.
As predicted, the move immediately triggered a global trade war, as more than 20 countries retaliated with tariffs against U.S. goods. European countries slapped tariffs on U.S. autos, tires, sewing machines, bicycles and other items. Canada hiked tariffs on almost one third of U.S. exports, including autos, textiles, agricultural and electrical equipment, eggs, meat and many other products.
The result was cataclysmic: International trade plunged 65 per cent. Stock markets experienced a renewed sharp downturn. U.S. exports fell to US$2.5-billion in 1932 from US$7-billion in 1929. The number of unemployed Americans almost tripled. As economist David Blanchflower summarized, “Smoot-Hawley Tariff proved to be the most damaging piece of trade legislation in U.S. history.”
As a result of this epic misstep, Smoot and Hawley lost their seats in Congress in 1932. In the same election, Franklin Delano Roosevelt swept Hoover out of office, with a promise to reverse the reviled tariffs. Then FDR proceeded to systematically negotiate tariff reductions to promote economic growth.
This tariff-reduction policy has continued since, spawning the General Agreement on Tariffs and Trade; the United States-Canada Auto Pact; the World Trade Organization; and the North American free-trade agreement, which was replaced by the current United States-Mexico-Canada Agreement. Since the Second World War, such tariff-reduction efforts have driven unprecedented global prosperity.
It is important to note that in 1930, Republicans had specifically used the same “America First” arguments Mr. Trump uses today to claim that tariffs will make the U.S. a “winner, not a loser.” But the difference is that the misguided high-tariff Republicans of those days have an excuse. Their world was still steeped in 19th-century mercantilism that viewed trade as a zero-sum game. The world had yet to learn the lesson of the postwar era: that freer trade can make both trading parties into winners.
But Mr. Trump seems to have missed those lessons about the possibility and importance of mutual benefit. The bully property developer can only see trade though the archaic “winner-loser” lens. The man who contemplates military invasions of Greenland and Panama – and taking Canada by “economic force” – can only see trade as domination and submission.
But this rigid approach is nonsense when applied to modern international trade, which also depends upon comparative advantage, long-standing business relationships, good will, trust and a search for mutual benefit.
Granted, tariffs are still defensible in specific situations: to respond to unfair practices/subsidies, to protect workers in critical industries and to protect the environment/human rights. But the broad, blunt tariffs Mr. Trump proposes are, to repeat the words of Henry Ford, “economic stupidity.” They could kill the golden goose – and destroy a framework that has given Canada, the U.S. and Europe decades of prosperity.
Mr. Trump’s past reckless gambling hurt only investors, creditors and workers who backed the casinos he drove bankrupt. But his gamble on tariffs raises far higher stakes. We could all lose our shirts. Somebody needs to stop him from throwing the dice on this one.