The Specter of Smoot-Hawley: Dangers and Potential Benefits of New Tariffs in a Global Economy

Just how bad are tariffs? There are doom and gloom predictions that raising tariffs will ruin not just the international economies but also that of the U.S.

However the repeated references to the massive tariffs imposed in 1930 which helped cause the great depression, there are a number of possible benefits to threatening imposition of tariffs and even of actually imposing them.

Those who point to the great depression and how tariffs helped make it much worse seem to forget that the U.S. and the rest of the world is not already on the brink of a terrible economic catastrophe and therefore the imposition of tariffs on a booming world economy may have very different results than when pounding on other countries which were already in a massive depression such as Germany.

Threatening tariffs and actually imposing them are two different things, one is a threat, the other is a club.

The following report was created by Google Gemini Deep Research and extensively fact checked by me. Other than a few minor additions and some formatting changes the rest of this article is entirely from the Gemini AI research program.

The re-election of Donald Trump has raised concerns about the potential for increased protectionism and trade barriers.

Trump has openly embraced tariffs as a central tool of his economic policy, and his administration is expected to act quickly and aggressively on trade policy in the coming months 1.

This article looks into the dangers and potential benefits of imposing massive new tariffs, drawing lessons from the historical precedent of the Smoot-Hawley Tariff Act of 1930 and analyzing how new tariffs might play out differently in today’s interconnected world.

The Potential Dangers of New Tariffs

Economists and policy analysts have voiced concerns about the potential for increased consumer prices, harm to U.S. workers, and disruptions to global supply chains 2.

Some argue that tariffs, while presented as a means to protect American industries, will ultimately harm the economy and make it more difficult to address global challenges 2.

Research has shown a negative relationship between tariffs and labor productivity in U.S. manufacturing 3. The 2018 tariffs, for example, had an overall negative impact on firm value and a mixed impact on supplier and customer industries 4.

One of the most significant risks is the potential for retaliatory tariffs from other countries 1.

If the United States imposes significant tariffs on imports, its trading partners are likely to respond in kind, leading to a trade war that could escalate quickly and have devastating consequences for the global economy 1.

For example, other countries could increase tariffs on U.S. imports and heighten tariffs on imports from other countries to counter the impact on their domestic industries of trade diversion caused by U.S. tariffs 4.

This could lead to a decline in global trade, reduced economic growth, and increased uncertainty for businesses and investors 5.

Tariffs Are Taxes

Tariffs essentially act as a tax on imported goods, making them more expensive for American consumers6. This can lead to higher prices for a wide range of products5. While proponents of tariffs argue that they protect American jobs, they often lead to job losses in export-oriented industries and harm consumers by reducing their purchasing power 7.

Furthermore, tariffs can disrupt global supply chains, making it more difficult and expensive for businesses to source components and raw materials5. This can lead to production delays, increased costs, and reduced competitiveness for American businesses4.

Based on what President Trump did during his first term, and on what he has said he will do if re-elected, the United States is expected to increase tariffs shortly after he is sworn in on January 20, 20251.

While no one really knows at this point, President Trump offered some clues on the campaign trail, suggesting the following targets and tariff rates:

1 Additional tariffs on all imports, regardless of country of origin (10% or 20%)

Additional tariffs on products of China (60%)

Additional tariffs on EVs made in Mexico by Chinese-owned companies (100%)

Additional tariffs on products of U.S. companies who move production abroad (100% or 200%)

The Smoot-Hawley Tariff Act: A Historical Precedent

The Smoot-Hawley Tariff Act of 1930 stands as a stark reminder of the potential dangers of protectionist trade policies. Enacted during the Great Depression, the act significantly raised tariffs on thousands of imported goods, with the aim of protecting American businesses and farmers8.

However, the act had the opposite effect, exacerbating the economic downturn and contributing to a global trade war 8.

Partial and general equilibrium assessments indicate that the Smoot-Hawley tariff itself reduced imports by 4-8 percent (ceteris paribus), although the combination of specific duties and deflation further raised the effective tariff and reduced imports an additional 8-10 percent 9.

The Smoot-Hawley Act increased tariffs on foreign imports to the U.S. by about 20%, prompting at least 25 countries to retaliate with their own tariffs on American goods 10. This led to a significant decline in global trade, further depressing economic activity and contributing to the severity of the Great Depression 10.

While the act was not the sole cause of the Great Depression, it is widely considered to have been a major contributing factor8.

The Smoot-Hawley Act had a devastating impact on the U.S. economy. Imports decreased by 66% between 1929 and 1933, while exports decreased by 61% 11. GNP fell sharply, and unemployment soared 11.

The act also had a profound impact on international relations, contributing to a climate of distrust and isolationism 12.

The following table shows the change in tariff levels for different product categories under Smoot-Hawley: 13

Table 1
Tariffs Rates under Fordney-McCumber vs. Smoot-Hawley

Source: U.S. Tariff Commission, The Tariff Review, July 1930, Table II, p. 196.

By this measure, Smoot-Hawley raised average tariff rates by about 2 ½ percentage points from the already high rates prevailing under the Fordney-McCumber Tariff of 1922.

Potential Benefits of New Tariffs

While the potential dangers of new tariffs are significant, proponents argue that they can offer certain benefits, such as protecting American industries, increasing federal revenue, and encouraging domestic manufacturing 14.

However, these benefits often come at a cost and may not outweigh the negative consequences.

One of the main arguments in favor of tariffs is that they can protect domestic industries from foreign competition 14. By making imported goods more expensive, tariffs can make domestically produced goods more competitive, potentially preserving jobs in key sectors 14.

However, this protection often comes at the expense of consumers, who have to pay higher prices for goods and services6.

Threat of Tariffs

There are also diplomatic implications of threatening to impose tariffs.

The mere threat of imposing heavy taxes in the form of tariffs on imported goods, even though the importers will simply raise prices to shift the increased prices to US consumers, can have a significent impact on trade negotiations.

After all, if a president says he will impose heavy tariffs it becomes very important for foreign companies to lobby their own governments to make better trade deals.

So, the mere threat of tariffs can have an important impact on international trade without any real impact on the economy.

Tariffs ARE Taxes = Revenue

Tariffs can also generate revenue for the federal government 14. As importers pay duties on foreign goods, this revenue can be used to fund government programs or reduce the deficit 15. However, the amount of revenue generated by tariffs is typically small compared to other sources of government revenue.

For example, in 2024, tariffs are expected to generate around $50 billion, compared to $2.5 trillion from individual income taxes 15.

Finally, tariffs can incentivize companies to manufacture goods in the United States 14. By making it more expensive to import goods, tariffs can encourage companies to shift production back to the United States, potentially creating jobs and boosting economic growth 14.

However, this can also lead to higher prices for consumers and may not be sustainable in the long run if it leads to retaliatory tariffs and a decline in global trade.

For example, the 2018 tariffs on imported steel, while intended to boost domestic production, did little to materially increase the number of jobs in U.S. steel plants 7.

How New Tariffs Might Act Differently

While the Smoot-Hawley Act provides a cautionary tale, it is important to recognize that the global economy has changed significantly since the 1930s.

“Note added by J. McCormick Today’s economy is far more interconnected, with complex global supply chains and a greater reliance on international trade. This means that new tariffs could have different, and potentially more complex, effects than those seen during the Great Depression.

Also, when the S-H tariffs were imposed the U.S. and the world in general was already in a recession and, despite the beliefs of far too many Americans, the U.S. is actually in a rapidly expanding business environment with employment near a practical zero – that is, economists consider a 4% unemployment rate essentially full employment because of the number of people always retiring, semi-retiring, or simply taking time off to attend school.”

The 2009 Recession and Financial Crisis will also be instructive.

Non-Tariff Barriers to Trade

One key difference is the rise of non-tariff barriers to trade 16. While tariffs remain a significant tool of trade policy, governments now have a wider range of measures at their disposal, such as quotas, subsidies, and regulations, to influence trade flows 16.

This means that a trade war today might not be fought solely with tariffs, but with a combination of different measures, making the economic consequences more difficult to predict.

International Value Chain Integration

International tariff connections image by Google Gemini

Another difference is the extent of international value chain integration 16. In today’s globalized economy, many products are produced through complex supply chains that span multiple countries 16.

This means that tariffs on one product can have ripple effects throughout the supply chain, affecting businesses and consumers in multiple countries 4.

This interconnectedness could make the impact of new tariffs less predictable and potentially more damaging than in the past.

Conclusion Tariff Impact

The potential imposition of massive new tariffs raises serious concerns for the global economy.

While proponents argue that tariffs can offer certain benefits, the historical precedent of the Smoot-Hawley Tariff Act and the complexities of today’s globalized economy suggest that the risks outweigh the potential rewards.

A resurgence of protectionism could lead to a trade war, higher prices for consumers, job losses, and disruptions to global supply chains.

The Smoot-Hawley Act demonstrates the potential for protectionist trade policies to backfire and exacerbate economic downturns 8.

It is crucial for policymakers to carefully consider the potential consequences of new tariffs and to pursue alternative solutions to address trade imbalances and support domestic industries.

These solutions could include:

Investing in education and training to enhance the skills of American workers.

Promoting innovation and technological advancement to improve the competitiveness of American businesses

Strengthening international cooperation to address global challenges and promote open trade.

In a world facing numerous challenges, including climate change, pandemics, and geopolitical instability, cooperation and open trade are more important than ever.

By pursuing these alternative solutions, policymakers can foster a more stable and prosperous global economy that benefits all countries.

Works cited in footnotes

1. Trump Trade Policy 2.0: U.S. Tariff Risk and Opportunities | Insights | Sidley Austin LLP, accessed January 3, 2025, https://www.sidley.com/en/insights/newsupdates/2024/11/trump-trade-policy-2–us-tariff-risk-and-opportunities
2. Trump’s Tariffs Would Raise Prices, Harm U.S. Workers, and Make It Harder To Solve Global Problems, accessed January 3, 2025, https://www.americanprogress.org/article/trumps-tariffs-would-raise-prices-harm-u-s-workers-and-make-it-harder-to-solve-global-problems/
3. Did Tariffs Make American Manufacturing Great? New Evidence from the Gilded Age | NBER, accessed January 3, 2025, https://www.nber.org/papers/w33100
4. Are tariffs good or bad for the economy? Research says they can be bad for the supply chain, accessed January 3, 2025, https://news.gsu.edu/2024/10/15/are-tariffs-good-or-bad-for-the-economy/
5. The consequences of Trump’s tariff threats – Brookings Institution, accessed January 3, 2025, https://www.brookings.edu/articles/the-consequences-of-trumps-tariff-threats/
6. How Will Trump’s Universal and China Tariffs Impact the Economy? – Tax Foundation, accessed January 3, 2025, https://taxfoundation.org/blog/trump-tariffs-impact-economy/
7. Would Trump’s Tariffs Send Prices Soaring for Americans? | BU Today | Boston University, accessed January 3, 2025, https://www.bu.edu/articles/2024/would-trumps-tariffs-send-prices-soaring/
8. Smoot-Hawley Tariff Act – Overview, Legislative History, Impact – Corporate Finance Institute, accessed January 3, 2025, https://corporatefinanceinstitute.com/resources/economics/smoot-hawley-tariff-act/
9. The Smoot-Hawley Tariff: A Quantitative Assessment – National Bureau of Economic Research, accessed January 3, 2025, https://www.nber.org/system/files/working_papers/w5509/w5509.pdf
10. What Is the Smoot-Hawley Tariff Act? History, Effect and Reaction, accessed January 3, 2025, https://www.investopedia.com/terms/s/smoot-hawley-tariff-act.asp
11. Smoot-Hawley Tariff Act – Wikipedia, accessed January 3, 2025, https://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Act
12. Smoot-Hawley Tariff Act | History, Effects, & Facts | Britannica, accessed January 3, 2025, https://www.britannica.com/topic/Smoot-Hawley-Tariff-Act
13. Smoot-Hawley Tariff – EH.net – Economic History Association, accessed January 3, 2025, https://eh.net/encyclopedia/smoot-hawley-tariff/
14. The Trump Tariffs: Pros, Cons & Global Impact | EV Magazine, accessed January 3, 2025, https://evmagazine.com/news/the-trump-tariffs-pros-cons-global-impact
15. Trump favors huge new tariffs. How do they work? | PBS News, accessed January 3, 2025, https://www.pbs.org/newshour/economy/trump-favors-huge-new-tariffs-how-do-they-work
16. Trade wars then and now: Smoot-Hawley all over again – Rabobank, accessed January 3, 2025, https://www.rabobank.com/knowledge/d011321764-trade-wars-then-and-now-smoot-hawley-all-over-again

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