Back in 1930, 1028 prominent economists wrote a letter to Congress urging them to reject the highly protectionist Smoot-Hawley Tariff Act. Messrs Smoot and Hawley, Senator and Representative respectively, sponsored the Tariff Act which raised the tariffs on more than 20,000 imported goods. Congress did not heed to the advice of the economists and went ahead with the Tariff Act. Naturally, other countries followed suit and retaliated against the US protectionist measures. This had disastrous consequences on the American economy and global trade, in general.
US imports decreased 66% between 1929 and 1933, and exports decreased 61% in the same time period. Gross National Product fell from $103 billion in 1929 to $76 billion in 1931 and bottomed out at $56 billion in 1933. Overall, world trade decreased by some 66% between 1929 and 1934. The tariffs, which were meant to protect American jobs, did not do much on that account either. Unemployment was at 8% in 1930 when the Smoot–Hawley tariff was passed. The rate jumped to 16% in 1931, and 25% in 1932–33. To be sure, not all of these effects can be attributed solely to the protectionist measures, given that the economy was in a downturn already, but it did have a significant negative effect.
Now, in 2018, President Trump has introduced a host of protectionist measures and imposed tariffs on washing machines, solar components, and even steel and aluminium used by U.S. manufacturers. With the reintroduction of tariffs, the economists are back once again. More than 1100 economists, including several previous Nobel prize winners, have signed a letter to Trump warning him of the dangers of the new protectionist measures. They draw his attention to history, to the Smoot-Hawley tariff in particular. In fact, the latter half of the letter just reproduces the economic principles laid out in the original letter. They reason that though the components and volume of trade have changed, “the fundamental economic principles as explained at the time have not”.
We are convinced that increased protective duties would be a mistake. They would operate, in general, to increase the prices which domestic consumers would have to pay. A higher level of protection would raise the cost of living and injure the great majority of our citizens.
Few people could hope to gain from such a change. Construction, transportation and public utility workers, professional people and those employed in banks, hotels, newspaper offices, in the wholesale and retail trades, and scores of other occupations would clearly lose, since they produce no products which could be protected by tariff barriers.
The vast majority of farmers, also, would lose through increased duties, and in a double fashion. First, as consumers they would have to pay still higher prices for the products, made of textiles, chemicals, iron, and steel, which they buy. Second, as producers, their ability to sell their products would be further restricted by barriers placed in the way of foreigners who wished to sell goods to us.
Our export trade, in general, would suffer. Countries cannot permanently buy from us unless they are permitted to sell to us, and the more we restrict the importation of goods from them by means of ever higher tariffs the more we reduce the possibility of our exporting to them. Such action would inevitably provoke other countries to pay us back in kind by levying retaliatory duties against our goods.
Finally, we would urge our Government to consider the bitterness which a policy of higher tariffs would inevitably inject into our international relations. A tariff war does not furnish good soil for the growth of world peace.
P.S: I had recorded a “The Seen and The Unseen” Podcast with Amit Varma on the 8 Myths of Protectionism. Check it out: