By Kenneth G. Pringle

The Smoot-Hawley Tariff Act of 1930 is blamed for deepening the Great Depression. Don't tell that to the Trump administration, which just unveiled the toughest tariffs in almost a century.

Investors see the new tariffs as threatening the economy, and stocks have gyrated wildly in recent days. President Donald Trump has slapped tariffs of 25% on goods from Mexico and Canada, plus an extra 10% tariff on Chinese imports, with a threat of more to come. Every fresh tidbit of news sends jumpy traders in a new direction.

But, then, who can blame them? Smoot-Hawley happened decades before they were born.

Enacted eight months after the Wall Street crash of 1929 and pushed by President Herbert Hoover as necessary protection for American farmers and workers, Smoot-Hawley was actually a product of the precrash good times. When congressional discussions began in 1928, the stock market was reaching new highs almost daily, much as it has in 2023 and 2024.

Smoot-Hawley was a Republican proposal, though Congress split along regional lines, with debate centering on the eternal question: Are the protections that tariffs provide to workers and industry worth the price increases that everyone else must pay?

In April 1929, amid congressional hearings on the tariff, The Wall Street Journal found all the arguments unconvincing. But it did come up with one conclusion, as true today as it was then.

"[N]othing and nobody anywhere is without a tangible interest in the tariff question," the Journal wrote, "not an industry, or a business, or a home, or an investment anywhere can escape the effects produced by changes in tariffs."

A tariff is a tax placed on imports and paid by domestic importers. In the U.S., tariffs are collected by Customs and Border Protection at the port entry.

Who ultimately pays the tariff depends. The importer could seek a concession from its foreign partner, who might accept a smaller profit margin as the cost for remaining in the U.S. market. The importer, too, may eat part of the tax. But some of the price increase is almost always borne by the consumer.

Tariff proponents call this a feature, not a bug. Eliminating low-cost imports allows U.S. businesses and farmers to compete on a level playing field, protecting good American jobs. This is what Trump argues today, and Hoover argued a century ago.

So, what happens next?

In 1930, the international reaction to Smoot-Hawley was swift and severe.

"Canadian Tariff Increases Hit American Exports," Barron's wrote June 8, 1931, as Ottawa enacted its third "upward revision" since Smoot-Hawley. It covered 174 items, a third of all American exports to its northern neighbor, including a 30% levy on midprice cars and 40% on luxury models.

Canada was hardly alone. Barron's reported that, in 1930 alone, 45 countries raised their tariffs on U.S. products.

U.S. big business sounded the alarm. "Hard-headed industrialists" joined with "professors of economics and doctors of politics" in opposing Smoot-Hawley, the Christian Science Monitor wrote on June 25, 1931.

Among those speaking out were the president of the Pennsylvania railroad, Boston store owner Edward Filene, heads of cotton and textile merchants associations, and car makers Henry Ford of Ford Motor and Alfred P. Sloan of General Motors.

"We can't expect to do all the selling and have the other fellow do all the buying," said future J.P. Morgan chairman Thomas W. Lamont in 1931, the "other fellow" being America's trade partners.

The logic behind the retaliatory trade measures was summed up by British Prime Minister Stanley Baldwin. "A tariff, among other things, is one of the quickest and most effective weapons to induce other countries to lower their tariff walls," said Baldwin, a confirmed protectionist himself.

Whether or not Baldwin's retaliatory tactics were the reason, the trade walls erected by Smoot-Hawley were torn down by the Reciprocal Trade Agreements Act of 1934. This allowed the president to negotiate bilateral agreements and served as a framework for the multilateral agreements that dominated the post-World War II "free trade" world.

Today, the consensus argument is that Smoot-Hawley and its retaliatory responses worsened the Great Depression by choking off trade just when the world economy needed it most.

Not everyone agrees. Robert Lighthizer, the U.S. Trade Representative during Trump's first term and an architect of his trade policies, has written that Smoot-Hawley "had little if any impact on the economic crisis of the early 1930s" amid larger forces at play.

Yet, in a sense, Baldwin was right. It took a depression and another world war, but the tariff walls were eventually lowered globally, and something close to a level playing field was created.

Not everyone plays by the rules anymore, argues Trump, and the global-trading system needs a reset to once more level out that playing field.

Hopefully this time we won't need a depression and world war to see it happen.

Write to editors@barrons.com

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March 06, 2025 00:01 ET (05:01 GMT)

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