|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 implementing protectionist trade policies sponsored by Senator Reed Smoot and Representative Willis C. Hawley and was signed into law on June 17, 1930. The act raised U.S. tariffs on over 20,000 imported goods.
The tariffs (this does not include duty-free imports - see Tariff levels below) under the act were the second-highest in the U.S. in 100 years, exceeded by a small margin by the Tariff of 1828. The Act and following retaliatory tariffs by America's trading partners were major factors of the reduction of American exports and imports by more than half during the Depression. Although economists disagree by how much, the consensus view among economists and economic historians is that "The passage of the Smoot-Hawley Tariff exacerbated the Great Depression."
In 1922, Congress passed the Fordney-McCumber Tariff act which increased tariffs on 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.
By the late 1920s the economy of the United States had made exceptional gains in productivity due to electrification, which was a critical factor in mass production. Horses and mules had been replaced by motorcars, trucks and tractors. One-sixth to one-quarter of farmland previously devoted to feeding horses and mules was freed up, contributing to a surplus in farm produce. Although nominal and real wages had increased, they did not keep up with the productivity gains. As a result, the ability to produce exceeded market demand, a condition that was variously termed overproduction and underconsumption. Senator Smoot contended that raising the tariff on imports would alleviate the overproduction problem; however, the US had actually been running a trade account surplus, and although manufactured goods imports were rising, manufactured exports were rising even faster. Food exports had been falling and were in trade account deficit; however the value of food imports were a little over half that of manufactured imports.
As the global economy entered the first stages of the Great Depression in late 1929, the US's main goal emerged to protect American jobs and farmers from foreign competition. Reed Smoot championed another tariff increase within the US 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 US 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.
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The consensus view among economists and economic historians is that the passage of the Smoot-Hawley Tariff exacerbated the Great Depression, although there is disagreement as to how much. In the popular view, the Smoot-Hawley Tariff was a leading cause of the depression. However, many economists hold the opinion that the tariff act did not greatly worsen the great depression. According to Paul Krugman, "Where protectionism really mattered was in preventing a recovery in trade when production recovered." He cites a report by Barry Eichengreen and Douglas Irwin: Figure 1 in that report shows trade and production dropping together from 1929 to 1932, but production increasing faster than trade from 1932 to 1937. The authors argue that adherence to the gold standard forced many countries to resort to tariffs, when instead they should have devalued their currencies.
Milton Friedman also held the opinion that the Smoot-Hawley tariff of 1930 did not cause the Great Depression, instead he blamed the lack of sufficient action on the part of the Federal Reserve. Douglas A. Irwin wrote: "most economists, both liberal and conservative, doubt that Smoot-Hawley played much of a role in the subsequent contraction."
Peter Temin, an economist at the Massachusetts Institute of Technology, explained that a tariff is an expansionary policy, like a devaluation as it diverts demand from foreign to home producers. He noted that exports were 7 percent of GNP in 1929, they fell by 1.5 percent of 1929 GNP in the next two years and the fall was offset by the increase in domestic demand from tariff. He concluded that contrary the popular argument, contractionary effect of the tariff was small. (Temin, P. 1989. Lessons from the Great Depression, MIT Press, Cambridge, Mass)
William Bernstein wrote "most economic historians now believe that only a minuscule part of that huge loss of both world GDP and the United States' GDP can be ascribed to the tariff wars "because trade was only nine percent of global output, not enough to account for the seventeen percent drop in GDP following the Crash. He thinks the damage done could not possibly have exceeded 2 percent of world GDP and tariff "didn't even significantly deepen the Great Depression." (A Splendid Exchange: How Trade Shaped the World)
Nobel laureate Maurice Allais maintained that tariff was rather helpful in the face of deregulation of competition in the global labor market and excessively loose credit prior to the Crash which, according to him, caused the crisis in financial and banking sectors. He noted higher trade barriers were partly a means to protect domestic demand from deflation and external disturbances. He observes domestic production in the major industrialized countries fell faster than international trade contracted; if contraction of foreign trade had been the cause of the Depression, he argues, the opposite should have occurred. So, the decline in trade between 1929 and 1933 was a consequence of the Depression, not a cause. Most of the trade contraction took place between January 1930 and July 1932, before the introduction of the majority of protectionist measures, excepting limited American measures applied in the summer of 1930. It was the collapse of international liquidity that caused of the contraction of trade.
Threats of retaliation by other countries 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, Canada, the country's most loyal trading partner, retaliated by imposing new tariffs on 16 products that accounted altogether for around 30% of US 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.
In 1932, with the depression only having worsened for workers and farmers despite Smoot and Hawley's promises of prosperity from a high tariff, the two lost their seats in the elections that year.
In the two volume series published by the US 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. 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.
The average tariff rate on dutiable imports  increased from 40.1% in 1929 to 59.1% in 1932 (+19%). However, it was already consistently at high level between 1865 and 1913 (from 38% to 52%). Moreover, It has also risen sharply in 1861 (from 18.61% to 36.2%; +17.6), between 1863 and 1866 (from 32.62% to 48.33%; +15.7%), between 1920 and 1922 (from 16.4% to 38.1%; +21.7%), without producing global depressions.
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.
US 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. GNP fell from $103.1 billion in 1929 to $75.8 billion in 1931 and bottomed out at $55.6 billion in 1933. Imports from Europe decreased from a 1929 high of $1.3 billion to just $390 million during 1932, while US exports to Europe decreased from $2.3 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. There is some contention about whether this can necessarily be attributed to the tariff, however. It was not until World War II, 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.
The 1932 Democratic campaign platform pledged to lower tariffs. After winning the election, President Franklin Delano Roosevelt and the now-Democratic Congress passed Reciprocal Trade Agreements Act of 1934. This act allowed the President to negotiate tariff reductions on a bilateral basis, and also treated such a tariff agreement as regular legislation, requiring a majority, rather than as a treaty requiring a two-thirds vote. This was 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 understanding supported a push towards multi-lateral trading agreements that would prevent similar situations in the future. 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 a proposed 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-World War II changes to the Smoot-Hawley tariffs reflected a general tendency of the United States to reduce its tariff levels unilaterally 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 US (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 US level of 1929 demonstrating that few nations were reciprocating in reducing their levels as the U.S. reduced its own.
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.
The act has been compared to the 2010 Foreign Account Tax Compliance Act (FATCA), with Andrew Quinlan from the Center for Freedom and Prosperity calling FATCA "the worst economic idea to come out of Congress since Smoot-Hawley".