«Introduction Most would agree that the single most important economic event of the twentieth century was the worldwide depression of the 1930s. This ...»
Parade of Protection: A Survey of the
European Reaction to the Passage
of the Smoot-Hawley Tariff Act of 1930
ABSTRACT. One of the most egregious errors committed during the Great Depression was the Smoot-Hawley Tariff Act of 1930.
It was the highest U.S. tariff of the century and sparked massive foreign protest. Immediate retaliation from Spain, Italy,
Switzerland and Canada destabilized the Western market. It nearly collapsed when Great Britain, France and Germany reacted to the crisis. Smoot-Hawley did not cause the Great Depression, but it certainly worsened it by initiating a wave of trade barriers that severely reduced world trade. It should be a caveat for all international trade issues and persuasively shows why protectionism is a dubious policy.
Introduction Most would agree that the single most important economic event of the twentieth century was the worldwide depression of the 1930s. This catastrophic event was the outgrowth of many poor decisions in the United States and abroad. Yet, some economists and politicians blame a single American legislative action: the Smoot-Hawley Tariff Act of 1930. This governmental action was not the cause of the depression that started in 1929. Enacted at a crucial point of the downturn, the tariff did contribute to the deepening of that depression by reducing world trade.
The Smoot-Hawley Act ushered in the partial collapse of international trade through the immediate retaliation of Spain, Italy, Switzerland and Canada. It contributed to a complete collapse of trade through the delayed reaction of Great Britain and France.
The Smoot-Hawley Tariff remains one of the most controversial legislative measures in U.S.
history. The publicity and furor over the debates in Congress makes the recent NAFTA controversy look tame. It was a classic example of extreme protectionism. It should serve as a caveat for all major international trade issues. When Pat Buchanan calls for a return to our glorious protectionist past, one should remember the kind of hazardous path to which that may lead. When President Clinton threatens to remove most favored nation status from China, one should realize that this might spark a retaliation similar to Europe’s following the 1930 Tariff.
We are now three generations past the Smoot-Hawley Bill so its lessons are fading. One should never forget a lesson of this magnitude. Extreme protection will more than likely bring about international retaliation and destabilize the world economy.
The Smoot-Hawley Tariff Act of 1930 The Smoot-Hawley Tariff was born as an agricultural tariff during the election of 1928. The twenties were a decade of prosperity for the United States, partly due to the fact that it was relatively unharmed by World War I. Yet, the agricultural sector of the economy was lagging behind. Oversupply of grains had forced worldwide grain prices through the floor. Republican nominee for president, Herbert Hoover, felt for the farming community and inserted a minor campaign plank to increase agricultural tariffs. Hoover was elected in a landslide and he immediately called a special session of Congress to adjust agricultural duties.
The handling of the tariff by Congress is where the Bill went completely awry. The Republican-dominated House Committee on Ways and Means penned the original draft, beginning in January of 1929. It was clear from the outset that this bill would cover much more than agriculture. Led by Willis Hawley (R-OR), the bill easily passed through the House. The draft that emerged protected numerous manufacturing and industrial interests that were not intended to be a part of the Act. Each Congressman felt the urge to protect the respective industries of their constituents, regardless of need [Taussig, 1967, 494-495]. The expanded bill was passed on to the Senate in June 1929.
The Senate did not finish their deliberations until June 1930, as debates dominated the headlines for an entire year. The chairman of the Senate Finance Committee, which was responsible for drafting the final bill, was a Mormon apostle named Reed Smoot (R-UT). It was an epic battle between the old guard Republicans, led by Smoot, and the Democrats, who were aided by insurgent Republicans. Debate raged for months as the world anxiously awaited the outcome. The Republicans favored the tariff for many reasons. Prominent in the debates was a desire to soften the impact of the stock market crash and to reward industries that had supported them in the campaign [Pastor, 1980, 79]. Opponents of the bill feared that it would protect inefficient firms, cause foreign retaliation and force Europe to default on WWI loans [Magill, 1994c, 591]. Yet, in the end, enough Democrats and insurgents were convinced and the Senate passed the bill on June 14, 1930. The vote was a slim majority of 44-42.
The only obstacle left was Hoover’s signature. Many hoped that a letter from over one thousand economists that urged veto of the Act would sway him, but it did not. Hoover was by no means pleased with the bill, but felt compelled to sign it as he probably did not want to make the past year of Senate debates meaningless. His faith in the bill rested with the “flexible provision”. Hoover proclaimed, “…the outstanding step of this tariff legislation has been the reorganization of the largely inoperable flexible provision of 1922…” [Hoover, 1971, 57]. This provision created the Tariff Commission to adjust duties, based upon the principle of production cost equalization. However, the provision was anything but flexible, as it denied government officials any room to negotiate mutual concessions [Warren, 1959, 85]. Secondly, duties were rarely adjusted by the Commission because of the inherent difficulties in obtaining accurate production costs. Nevertheless, Hoover had confidence in the provision, if not the entire tariff.
The Smoot-Hawley Tariff Act was signed on June 17, 1930. It became the highest U.S. tariff of the 20th century and is considered to be the most blatantly protective tariff in its history. The average rate on all dutiable goods rose to 52.8%, an increase of 18% from the FordneyMcCumber Act of 1922 [Pastor, 1980, 78]. Some of the most important products on the list included: sugar, cotton, hides, meat and dairy products, cotton, wool and silk textiles, chinaware and surgical instruments [Taussig, 1967, 500-515]. This small sample (381 increases in total) shows the variety of products that received protection. This “agricultural tariff” included numerous industrial products, many of which provoked the enmity of the international market.
Table 1: Value of Exports and Imports for 1930 & 1931 in millions of dollars
Foreign nations were emphatically displeased with the Smoot-Hawley Tariff. Approximately sixty nations had sent formal protests to the U.S. government by June of 1930 [Pastor, 1980, 81]. Most of these nations were in debt to the United States, primarily due to the physical damage and monetary costs of World War I [Ratner, 1972, 53]. The United States had just previously renounced its role as world creditor by severely limiting further loans. Faced with a decreased flow of money, the only method of repayment for Europe was selling goods to the U.S. This method was effectively annulled by SmootHawley, so their only resort was to retaliate. The result, as can be seen in Table 1, was a collapse of world trade.
Table 1 clearly shows that each of the major industrial nations experienced a decline in the value of imports and exports from 1930 to 1931. Obviously, the depression contributed greatly to this reduction in trade. However, the Smoot-Hawley Tariff and the many foreign reactions to it presumably played a more direct role in the decline. As can be seen, the total decline in imports and exports was greater than 27%.
The range of decline varied from an 11.4% drop in Belgian exports to Australia’s 64% decrease in imports. When the best figure achieved is an 11.4% decline, it is obvious that the international trading system had collapsed by 1931.
The Immediate Reaction Scholars and economists have debated endlessly over the degree to which the world retaliated to the Smoot-Hawley Tariff Act of 1930. There is a small segment that believes that the proliferation of barriers to trade in the 1930s were due primarily to domestic decisions. While domestic concerns certainly played a role in most of the restrictions (i.e. protection for struggling industries), the Smoot-Hawley Tariff worsened the problems that concerned each nation. Thus, this international action became a domestic problem that required a reaction from each country. How could the effective abandonment of the world market by the most powerful nation not instigate a reaction? Along this line, Joseph M. Jones Jr. makes a strong case for retaliation in Spain, Italy, Switzerland and Canada. His work, Tariff Retaliation, remains the most extensive analysis of the world reaction to the 1930 Tariff. The Spanish tariff, Italian automobile tariff, Swiss boycott and Canadian tariff were direct retaliations against Smoot-Hawley that seriously reduced world trade.
SPAIN ERECTS THE WAIS TARIFF
Spanish hostility to the United States had been growing throughout the 1920s. A series of U.S. provisions and quarantines were met with dismay in Spain. The measure that hurt the most was Prohibition. Wine was one of Spain’s best international products and was its top export to the U.S. [Jones, 1934, 37-38].
Prohibition put an abrupt halt to this trade. Another bone of contention was the fall in value of the peseta in the late 1920s. Jones points out that the reasons for its decline were varied, but the public held the not entirely erroneous belief that French and U.S. financiers were the cause [1934, 43]. They were the main parties that sold off pesetas, which deflated its value. Spain presents the clearest case of retaliation against Smoot-Hawley by enacting the Wais Tariff of 1930.
In light of their unhappiness with U.S. actions, the Wais Tariff was a completely logical response to the Smoot-Hawley Act. Spanish officials made it clear how they would react if Smoot-Hawley passed.
An undersecretary of the Ministry of State was quoted in the May 29, 1930 edition of El Imparcial, “The denunciation of our (commercial) treaty with the United States does not depend on us; it depends upon how they comport themselves, upon what they do” [Jones, 1934, 50]. In this case, the “what they do” referred to whether the U.S. passed Smoot-Hawley. In fact, by May the Council of Ministers had decided upon reciprocal action [Jones, 1934, 50]. The Wais Tariff was decreed on July 22.
The Tariff was aimed at the United States, France and Italy. The main goal of the decision was to improve the trade balance and the value of the peseta. Most important to U.S. interests were the restrictions on automobiles.
Table 2: Number of Automobiles Imported Into Spain
As can be seen, imports from all countries were reduced drastically in1930 and 1931, following the Wais Tariff. Most auto imports became saddled with increases of 100%-150% on duties [Jones, 1934, 53]. In the long run, Germany, Great Britain and Canada wound up big winners, at the expense of the other three. Each of them experienced a significant gain in autos exported to Spain between 1929 and
1932. One can also see that France and Italy saw increases in exports in 1932. This is due to the fact that France and Italy signed compromise treaties in an effort to “make up” with Spain [Jones, 1934, 54-60].
The U.S. saw no relief in the cutbacks on imports of automobiles. In fact, the U.S. was singled out in a separate duty. This extra duty was put on non-European autos assembled in Europe and shipped to Spain. Jones explains that this was a clear shot at General Motors, in that they found it profitable to ship parts to Amsterdam for assembly [1934, 53]. It was no secret that the Wais Tariff was aimed primarily at
the United States. Among the other products included on the list were the main U.S. exports to Spain:
razor blades, sewing machines, films, motorcycles and bicycles. No “make-up” treaty was made between Spain and the States. Spain cut U.S. auto imports by 94% in three years, from 7,415 to 473 autos. The Wais Tariff was a clear retaliation to the Smoot-Hawley Tariff.
ITALY SEVERELY LIMITS U.S. AUTOMOBILES
Being an agricultural country, Italy was hit hard by the falling grain prices of the 1920s. Combined with the decrease in foreign money available to borrow, Italy was feeling the full force of the worldwide downturn. It should be no surprise that they followed the passage of Smoot-Hawley with great interest.
The Italian public felt like the U.S. was trying to ruin the entire world, for her own benefit [Jones, 1934, 69]. When it did finally pass, Italy enacted a strict automobile tariff in an attempt to protect its dominant automaker, Fiat.
Italy’s Fiat was one of Europe’s top-selling car companies during the 1920s. It completely dominated the domestic market and was a major exporter. However, by the late twenties, U.S. cars began to sweep over Europe. Fiat’s competitiveness in the export market disappeared [Jones, 1934, 77]. Automobiles were one of America’s top exports to Italy, so naturally Fiat asked for protection. Their pleas fell upon the deaf ear of Premier Benito Mussolini. He was convinced that U.S. cars were higher quality and that competition would be healthy for Italy [Jones, 1934, 77]. The passage of Smoot-Hawley provided Fiat with the ammunition it needed for protection.
It may be possible that Italy would have enacted an auto tariff in the absence of the Smoot-Hawley Act. Fiat, as has already been stated, was pushing for protection prior to the Act. Faced with a viable competitor like the United States, it is quite likely that a tariff would have been enacted independently [Eichengreen, 1989, 33]. However, it is doubtful that tariff would have been as prohibitive as the one actually passed. This is clear from the amount of public outrage to the American tariff. Also, Mussolini wasn’t keen on protecting Italy’s less efficient auto production. It seems that Italy’s tariff was retaliatory towards the United States.
The passage of Smoot-Hawley added fuel to the fire of Fiat’s drive for protection. Public outrage to the U.S. tariff helped to sway many leaders. On June 30, 1930 (two weeks after passage of the U.S.