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How ‘Protectionist’ Became An Insult

June 18, 2010

Eighty years ago, on June 17, 1930, President Herbert Hoover signed the infamous Smoot-Hawley tariff, significantly raising the duties on imported goods. Hoover and his congressional allies thought that reducing imports would strengthen the economy. Instead, it contributed to a collapse in world trade and the spread of protectionism around the globe. The lessons from this policy mistake are unfortunately all too relevant today.
The Smoot-Hawley tariff, conceived as a Republican ploy to gain the farm vote in the 1928 election, was a bad idea from the start. A tariff could not help farmers cope with low prices because most of them depended on exports. The nation sold one-half of its cotton, one-third of its tobacco, and one-fifth of its wheat and flour abroad. Their prices were set on the world market. The farmers who did compete against imports—sugar and wool—were already protected with high duties.
And once politicians opened the door to duties on farm goods, the result was a log-rolling, pork-barrel free for all in which the interests of consumers and exporters were ignored. When Colorado demanded a higher tariff on animal hides, Massachusetts, home of the shoe industry, insisted on a higher tariff on leather shoes.
Every congressman had some producer interests he wanted to protect. For Utah’s Sen. Reed Smoot it was sugar beets. As humorist Will Rogers put it: 120 million Americans eat sugar, 1,200 raise sugar, but Smoot “had dedicated his entire political career to make sugar not only sweet but dear to the 120 million.”
More than a thousand American economists signed a petition against the tariff bill. Prominent journalist Walter Lippmann criticized it as “a wretched and mischievous product of stupidity and greed.” No matter. Proponents such as New York Republican Congressman Frank Crowther pooh-poohed fears of reprisals and claimed the tariff would “raise the standard of American labor and American wages.”
While most economists do not hold the Smoot-Hawley tariff responsible for the Great Depression itself, it contributed to a sharp decline in world trade. The tariff slashed U.S. dutiable imports by about 15%, for example. Even worse, it spawned protectionism abroad.
America’s trading partners, notably Canada, did not turn the other cheek. Outraged at being kicked out of the U.S. market, the pro-American Canadian government retaliated against U.S. exports. Anti-American sentiment allowed the pro-British Conservatives to win a general election there just weeks after the tariff took effect. They retaliated again.
To illustrate the blowback: U.S. imports of eggs from Canada dropped to 8,000 dozen from 13,000 dozen after Smoot-Hawley. But U.S. egg exports to Canada dropped to 14,000 dozen from 920,000 dozen as a result of Canada’s retaliation.
Canada also led the charge to create a trade bloc within the British Empire that discriminated against U.S. goods. As a result, U.S. exports fell faster than U.S. imports during the Depression, even though the slump was more severe in the U.S. than elsewhere. There were other adverse political effects. The tariff helped ruin Cuba’s sugar economy, which led to the overthrow of Cuba’s pro-American government.
The damage wrought by this tariff had only one silver lining. Ever since, the ghosts of Reed Smoot and Willis Hawley (a Republican congressman from Oregon) have stood in the way of anyone arguing for higher trade barriers. They almost singlehandedly made the term “protectionist” an insult rather than a compliment.
The most important lesson of the Smoot-Hawley fiasco is that any protectionist move by the U.S. will be counterproductive if it leads to foreign retaliation. And there can be no doubt there will be such retaliation if the U.S. breaks world trade rules.
Another lesson is that active commercial diplomacy is needed to keep trade open. If the U.S. trade agenda remains inactive, other countries will move ahead and pursue trade agreements that put U.S. exporters at a competitive disadvantage in world markets.
On this score, the Obama administration should work to end the stalemate in Congress on the trade agreements with Colombia and South Korea. These agreements should be no-brainers because they are one-sided: The U.S. is already open to their goods, but this is not reciprocated. All the agreements do is level the playing field. And just as Smoot-Hawley had bad political effects abroad, trade agreements could have good ones—something to keep in mind as South Korea faces North Korea and Colombia struggles with Venezuela.
Mr. Irwin, a professor of economics at Dartmouth, is author of “The Smoot-Hawley Tariff and the Great Depression,” to be published next year by Princeton University Press.