Content of the material
Importers pay tariffs to their home government. Most economists find that the bulk of tariff costs are passed on to consumers. This is particularly true for industries, such as retail or grocery stores, with small profit margins. A 2019 study by researchers from the Federal Reserve and the University of Chicago found that consumers bore more than 100 percent of the costs of washing machine tariffs, indicating that appliance retailers charged even more than the tariffs had cost them. Some more recent research [PDF] has found that U.S. consumers have “borne the brunt” of the tariffs on Chinese goods through higher prices. Still other studies have pointed to different costs for consumers: with tariffs on their foreign competitors, domestic producers can safely raise their prices. Ultimately, consumers share the burden with importers.
At the same time, exporters can cut prices to hold on to their market share. Most empirical research on recent U.S. tariffs suggests this has not occurred, but economists agree it is a possibility. Tariffs can hurt exporters by making their products more expensive. They could struggle to maintain their sales or be forced to cut prices, which could cause profits to fall and potentially damage their home country’s economy.
The effect is particularly worrisome for countries whose economies are export-driven, including many of those in Asia. China became the world’s largest exporter in 2009, and Vietnam has become a hub for low-cost manufacturing exports. More recently, some high-income countries, such as Germany, have turned to exports to support their growth. Companies in countries that depend on exports for growth can lose customers when hit with tariffs, resulting in strong economic headwinds. Experts say that Trump’s tariffs contributed to a slight decline in China’s economic growth, though the effects are difficult to measure since growth was already slowing before the tariffs took effect.
The Great Retaliation (and Depression)
President Hoover signed the bill on June 17, 1930, a full 18 months after deliberations began. By then, the Great Depression had already begun. The stock market was in shambles, having crashed in October 1929 as the Senate debated its version of the bill. As the world economy sagged, it didn’t take long for America’s biggest trading partners to retaliate.
Canada struck first. Take eggs. Smoot-Hawley raised the tariff on a dozen Canadian eggs from 8 cents to 10 cents.
“So our imports shrank a little bit but our exports plummeted,” Irwin said. “So it totally backfired on the egg producers.”
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These kind of trade walls went up all across Europe as well, affecting all manner of U.S. producers. This confirmed what some call the Golden Rule of Protectionism: Tariff unto others as you would have others tariff unto you.
“It’s not just tariffs are harmful for the world economy,” Irwin said. “It’s that they really breed ill will among nations.”
So, what exactly was the damage from Smoot and Hawley’s big adventure?
The answer is, it’s complicated. Economists pretty much agree now that Smoot and Hawley’s handiwork didn’t tip us into the Depression. We were in the soup already by 1930. But it certainly didn’t relieve unemployment, like protectionists promised. And it probably helped deepen the Depression since it shattered world trade.
“The general contraction of trade led by trade barriers did harm the world economy and probably made the Great Depression worse,” Irwin said.
To Irwin, Smoot-Hawley’s lasting legacy was to reframe the nation’s conversation about trade.
“Smoot-Hawley really just made protectionism a bad word,” he said. “It gave it a bad connotation associated with all sorts of things. Declining exports. Declining employment. Great Depression. Ill will among foreign countries. And so it completely flipped. It really did discredit protectionism as a doctrine in American political life.”
It also left a mark on Smoot’s long senate career. He thought the bill would be his crowning legacy, but instead voters booted him out of office the next election cycle.
“Late in the game he was complaining to friends that he couldn’t sleep at night, that he was taking sleeping pills and they weren’t doing anything for him,” historian Cannon said. “He was just exhausted. And when his opponents blamed him for worsening the Depression, he took that very personally and voters of Utah turned him out. He took that very personally and became a shell of his former self.”
Smoot, however, defended the legislation long after its passage, according to historian Irwin. He was a devout patriot and protectionist to the end.
What can countries do to mitigate the effects of tariffs?
The most common way for countries to fight back against tariffs—aside from levying retaliatory tariffs—is to subsidize the domestic industries that have been hit. The Trump administration countered tariffs on agricultural products by providing farmers with tens of billions of dollars in aid to make up for lost exports. Many economists criticized this strategy as counterproductive and wasteful. Some fear that recipients come to rely on such assistance programs, making them difficult to end.
Some experts suggest that export-dependent countries could let their currencies depreciate in the face of tariffs. This would effectively cheapen exports and make them competitive despite tariffs. But it would also make consumers in that country poorer, as the local currency would have less purchasing power. Another remedy is to find alternative markets for imports and exports. Trump encouraged this, suggesting that companies facing tariffs on imports from China turn to Vietnam and other countries for their products. However, in testimony to the USTR’s office, many U.S. businesses complained that they were unable to quickly shift to sourcing products from outside of China, given the country’s dominance in manufacturing consumer products, and were therefore forced to pay the tariffs.
Ultimately, it might not be possible to reverse their effects. Once imposed, tariffs are difficult to remove because companies become used to the new environment and lobby against lifting them, experts say. The chicken tax on pickup trucks, for example, was imposed during a trade spat with the EU in 1964, yet has remained in place. If tariffs lead trading partners to find new buyers and sellers, those new relationships can endure.
The Basic Macroeconomics of the Tariff
Economists are almost uniformly critical of tariffs. One of the bedrock principles of economics is that voluntary trade makes everyone involved better off. For the U.S. government to interfere with trade between Canadian lumber producers and U.S. lumber importers — as it did under Smoot-Hawley by raising the tariff on lumber imports — makes both parties to the trade worse off. In a larger sense, it also hurts the efficiency of the U.S. economy by making it rely on higher priced U.S. lumber rather than less expensive Canadian lumber.
But what is the effect of a tariff on the overall level of employment and production in an economy? The usual answer is that a tariff will leave the overall level of employment and production in an economy largely unaffected. Although the popular view is very different, most economists do not believe that tariffs either create jobs or destroy jobs in aggregate. Economists believe that the overall level of jobs and production in the economy is determined by such things as the capital stock, the population, the state of technology, and so on. These factors are not generally affected by tariffs. So, for instance, a tariff on imports of lumber might drive up housing prices and cause a reduction in the number of houses built. But economists believe that the unemployment in the housing industry will not be long-lived. Economists are somewhat divided on why this is true. Some believe that the economy automatically adjusts rapidly to reallocate labor and machinery that are displaced from one use — such as making houses — into other uses. Other economists believe that this adjustment does not take place automatically, but can be brought about through active monetary or fiscal policy. In either view, the economy is seen as ordinarily being at its so-called full-employment or potential level and deviating from that level only for brief periods of time. Tariffs have the ability to change the mix of production and the mix of jobs available in an economy, but not to change the overall level of production or the overall level of jobs. The macroeconomic impact of tariffs is therefore very limited.
In the case of the Smoot-Hawley Tariff, however, the U.S. economy was in depression in 1930. No active monetary or fiscal policies were carried out and the economy was not making much progress back to full employment. In fact, the cyclical trough was not reached until March 1933 and the economy did not return to full employment until 1941. Under these circumstances is it possible for Smoot-Hawley to have had a significant impact on the level of employment and production and would that impact have been positive or negative?
A simple view of the determination of equilibrium Gross Domestic Product (Y) holds that it is equal to the sum of aggregate expenditures. Aggregate expenditures are divided into four categories: spending by households on consumption goods (C), spending by households and firms on investment goods — such as houses, and machinery and equipment (I), spending by the government on goods and services (G), and net exports, which are the difference between spending on exports by foreign households and firms (EX) and spending on imports by domestic households and firms (IM). So, in the basic algebra of the principles of economics course, at equilibrium, Y = C + I + G + (EX – IM).
The usual story of the Great Depression is that some combination of falling consumption spending and falling investment spending had resulted in the equilibrium level of GDP being far below its full employment level. By raising tariffs on imports, Smoot-Hawley would have reduced the level of imports, but would not have had any direct effect on exports. This simple analysis seems to lead to a surprising conclusion: by reducing imports, Smoot-Hawley would have raised the level of aggregate expenditures in the economy (by increasing net exports or (EX – IM)) and, therefore, increased the level of GDP relative to what it would otherwise have been.
A potential flaw in this argument is that it assumes that Smoot-Hawley did not have a negative impact on U.S. exports. In fact, it may have had a negative impact on exports if foreign governments were led to retaliate against the passage of Smoot-Hawley by raising tariffs on imports of U.S. goods. If net exports fell as a result of Smoot-Hawley, then the tariff would have had a negative macroeconomic impact; it would have made the Depression worse. In 1934 Joseph Jones wrote a very influential book in which he argued that widespread retaliation against Smoot-Hawley had, in fact, taken place. Jones’s book helped to establish the view among the public and among scholars that the passage of Smoot-Hawley had been a policy blunder that had worsened the Great Depression.
The Republican Party platform for 1928 is reprinted as: “Republican Platform [of 1928]” in Arthur M. Schlesinger, Jr., Fred L. Israel, and William P. Hansen, editors, History of American Presidential Elections, 1789-1968, New York: Chelsea House, 1971, Vol. 3. Herbert Hoover’s views on the tariff can be found in Herbert Hoover, The Future of Our Foreign Trade, Washington, D.C.: GPO, 1926 and Herbert Hoover, The Memoirs of Herbert Hoover: The Cabinet and the Presidency, 1920-1933, New York: Macmillan, 1952, Chapter 41. Trade statistics for this period can be found in U.S. Department of Commerce, Economic Analysis of Foreign Trade of the United States in Relation to the Tariff. Washington, D.C.: GPO, 1933 and in the annual supplements to the Survey of Current Business.
A classic account of the political process that resulted in the Smoot-Hawley Tariff is given in E. E. Schattschneider, Politics, Pressures and the Tariff, New York: Prentice-Hall, 1935. The best case for the view that there was extensive foreign retaliation against Smoot-Hawley is given in Joseph Jones, Tariff Retaliation: Repercussions of the Hawley-Smoot Bill, Philadelphia: University of Pennsylvania Press, 1934. The Jones book should be used with care; his argument is generally considered to be overstated. The view that party politics was of supreme importance in passage of the tariff is well argued in Robert Pastor, Congress and the Politics of United States Foreign Economic Policy, 1929-1976, Berkeley: University of California Press, 1980.
A discussion of the potential macroeconomic impact of Smoot-Hawley appears in Rudiger Dornbusch and Stanley Fischer, “The Open Economy: Implications for Monetary and Fiscal Policy.” In The American Business Cycle: Continuity and Change, edited by Robert J. Gordon, NBER Studies in Business Cycles, Volume 25, Chicago: University of Chicago Press, 1986, pp. 466-70. See, also, the article by Barry Eichengreen listed below. An argument that Smoot-Hawley is unlikely to have had a significant macroeconomic effect is given in Peter Temin, Lessons from the Great Depression, Cambridge, MA: MIT Press, 1989, p. 46. For an argument emphasizing the importance of Smoot-Hawley in explaining the Great Depression, see Alan Meltzer, “Monetary and Other Explanations of the Start of the Great Depression,” Journal of Monetary Economics, 2 (1976): 455-71.
Recent journal articles that deal with the issues discussed in this entry are:
Callahan, Colleen, Judith A. McDonald and Anthony Patrick O’Brien. “Who Voted for Smoot-Hawley?” Journal of Economic History 54, no. 3 (1994): 683-90.
Crucini, Mario J. and James Kahn. “Tariffs and Aggregate Economic Activity: Lessons from the Great Depression.” Journal of Monetary Economics 38, no. 3 (1996): 427-67.
Eichengreen, Barry. “The Political Economy of the Smoot-Hawley Tariff.” Research in Economic History 12 (1989): 1-43.
Irwin, Douglas. “The Smoot-Hawley Tariff: A Quantitative Assessment.” Review of Economics and Statistics 80, no. 2 (1998): 326-334.
Irwin Douglas and Randall S. Kroszner. “Log-Rolling and Economic Interests in the Passage of the Smoot-Hawley Tariff.” Carnegie-Rochester Series on Public Policy 45 (1996): 173-200.
McDonald Judith, Anthony Patrick O’Brien, and Colleen Callahan. “Trade Wars: Canada’s Reaction to the Smoot-Hawley Tariff.” Journal of Economic History 57, no. 4 (1997): 802-26.Citation: O’Brien, Anthony. “Smoot-Hawley Tariff”. Encyclopedia, edited by Robert Whaples. August 14, 2001. URL