Smoot-Hawley Tariff
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21 Aug, 2024
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Smoot-Hawley Tariff Definition
The Smoot-Hawley Tariff Act, also known as the United States Tariff Act of 1930 or the Hawley-Smoot Tariff Act, is a law enacted by the U.S. government with the main objective to safeguard American farmers and businesses by increasing tariffs.
The Act, named after its primary sponsors, Senator Reed Smoot and Willis Hawley, stands as the final legislation where the U.S. Congress directly sets tariff rates. Notably, the Act further escalated the already high tariff rates established by the Fordney-McCumber Act of 1922, which had previously raised the average import tax.
Table of Contents
- The Smoot-Hawley Tariff Act is a law passed by the U.S. government. It raised duties as a measure to protect American farmers and businesses.
- During World War I, the tariffs were already as high as 50%, and the country's agriculture failed to recover from the 1920–21 recession.
- The situation was problematic as food prices plummeted, and agriculture took a back seat.
- This prevailing uncertainty prompted President Herbert Hoover to call for the protection of certain agricultural commodities. The Act resulted in a six percentage point increase in the average U.S. tariff rates on dutiable imports.
Smoot-Hawley Tariff Explained
The Smoot-Hawley Tariff Act of 1930 (U.S.) was enacted as a protective measure for agricultural products. During World War I, the tariffs were already as high as 50%, and the country's agriculture failed to recover from the 1920–21 recession. Debts rose between 1917 and 1920 and pushed the U.S. government to impose tariffs on certain agricultural and industrial goods.
The situation was problematic as food prices plummeted, and agriculture took a back seat. This prevailing uncertainty prompted President Herbert Hoover to call for the protection of certain agricultural commodities. The Act bolstered agricultural production by implementing protectionist trade policies in the U.S. This, however, harmed international trade as it nudged other countries to raise their tariffs to protect their industries. The country started imposing tariffs against it, which significantly brought down global trade.
Due to its negative image, the Smoot-Hawley Tariff Act has been blamed for the start of the Great Depression, it's worsening, and the collapse of international finance and trade. Even before the Tariff Act was passed, there were significant objections on a national and international level. By the fall of 1929, 35 colonies and nations openly opposed the tariff bill, including some of the U.S.'s greatest trading partners, such as the UK, Germany, and Japan.
History
The Smoot-Hawley Tariff Act of the 1930's roots can be timed back to the First World War era. During that period, European agricultural production declined due to ongoing issues. A set of new world producers had come into the picture and captured the market, and they had borrowed heavily for expansion. However, after a period, the European producers returned, and global supply increased. As a result, crop prices fell, and the U.S. faced a deep recession (1920–1921). The following decade was a dark period for agriculture.
The farm incomes were declining, and the farmers became heavily indebted and lost their farms to the mounting pressure. Consequently 1922, the Fordney-McCumber tariff act was passed, but the protection resulted in a sharp increase in industrial goods. The Democrats and Republicans, who favored agriculture, demanded that industrial tariffs be decreased, or agricultural prices increased. It was not until 1928–29 that things started to move in favor of the agenda.
Willis Hawley began hearing the new tariff bill in 1929 (January), and a bill that approved increased tariffs on industrial goods more than those on agri-products was passed. In May 1929, the House, under the Senate finance committee chaired by Reed Smoot, proposed certain changes and made them beneficial to agriculture. After going through considerations in September of that year and finally being signed on June 17th by President Hoover, the Act came into effect on the same day. The Act resulted in a six percentage point increase in the average U.S. tariff rates on dutiable imports.
Effects On The Stock Market
The Smoot-Hawley Act gripped the stock market with fear. The stock market was already in turmoil, and the downturn continued. This came when the Great Depression was already at its cyclical peak as of August 1929; a crash followed in October 1929. It was reported that the New York Stock Exchange crashed twice in eight months in the Act's history.
The Dow Jones Industrial Average, a metric that tracks 30 major publicly owned blue-chip companies on the Nasdaq and New York Stock Exchange, also fell. The average had fallen by around 23% in the first two weeks of June (1930). Similarly, it was reported that the New York Stock Exchange crashed twice in eight months in the Act's history. On June 16th, the date the bill was to be approved, a loss of stocks valued at $1 billion was reported.
Impact On The U.S. Economy
The Smoot-Hawley Act did not directly impact the U.S. economy. Instead, it was said to have an effect through other routes, such as bank failures. Trade conflicts were one of the major effects of the Smoot-Hawley Tariff Act. Gold continued to enter the United States due to trade disputes, keeping prices inflated. However, there was a decline in net exports due to the artificially high pricing. This led to bank runs due to decreased net exports and deflation. A recession turned into a depression that lasted over a decade due to the improper handling of bank failures.
Frequently Asked Questions (FAQs)
The Smoot-Hawley Act diverted consumer demand away from foreign products by imposing high tariffs on imported goods. This made foreign products more expensive for consumers, leading them to seek alternative domestic options instead.
The misuses of the Smoot-Hawley Tariff Act were significant and had far-reaching consequences. One major misuse was its negative impact on international trade. The Act's imposition of high tariffs on imported goods triggered retaliatory actions from other countries, resulting in a downward spiral of global trade. This retaliatory tariff war further exacerbated the economic conditions of the Great Depression, hindering economic recovery and prolonging the financial crisis. The Act's protectionist measures hindered the growth of international commerce and contributed to worsening economic conditions domestically and abroad.
European countries reacted to the Hawley-Smoot Tariff by retaliating against their own tariffs. They saw the Act as protectionist and harmful to international trade. Many European nations imposed higher tariffs on American goods, leading to a further decline in global trade and exacerbating the economic downturn of the Great Depression.
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