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IPFS News Link • Free Trade

How Trade Wars Become Hot Wars


America is in a funk. Slipping into an economic and cultural morass and at risk of losing its footing on the global chessboard, American workers find themselves working harder than ever and still falling further and further behind. How can this be?

Flailing for an answer, they find it in the mouth of a politician who tells them he can make America great again! The problem is a trade imbalance. Americans are getting hammered by their foreign competition, the politician says, and they need strong tariffs to save the economy and restore the might of the USA. These tariffs outrage even friendly nations and provoke retaliatory measures that spiral into an all-out trade war.

2018? Donald Trump?

No. 1930. Senator Reed Smoot.

What? Did they glaze over this one in history class? Gee, I wonder why.

Long story short(ish): The post-WWI reconstruction boom led not to a happy increase in global trade, but an increase in global trade tensions. Reparations and war debts could only realistically be paid in goods, so everyone wanted a trade surplus. Throw in the gradual breakdown of the international gold standard, vicious competition among nations that had been in all-out war only years earlier, and the beginnings of the Great Depression, and by 1930 you had the perfect storm of economic conditions to bring about a global trade war. And that is exactly what happened.

The Republicans, led by Hoover, had come to power in 1928 promising American agricultural workers that the government would protect them from foreign competition. Senator Reed Smoot, a Mormon apostle from Utah and chairman of the Senate Finance Committee, championed higher tariffs across the board and, sponsoring a bill with Congressman Willis Hawley from Oregon, he got his wish. The bill was originally intended to satisfy the agricultural workers, but industrial producers soon piled on with their demands. After the dust settled, the Smoot-Hawley Act of 1930 went down as one of the most extensive pieces of protectionist legislation in the history of America. The act raised tariffs on over 20,000 goods. The average price raise was 59.1% and, when the bill was signed into law by President Hoover on June 17, 1930, the price of some goods quadrupled overnight.

And then all of the country's economic problems went away and America experienced the greatest period of growth in the history of the universe. USA! USA! USA . . .

. . . Oh wait. Sorry about that. This just in: Things did not go very well at all. In fact, despite Hawley's insistence that the act would usher in "a renewed era of prosperity" (Make America Great Again?) and Smoot's claim that the Depression "would have been worse without the higher tariff," the exact opposite occurred. Global trade shrank a startling 66% in the first five years after Smoot-Hawley and the bill is now universally blamed for exacerbating, lengthening and deepening the Great Depression.