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Smoot-Hawley did not cause the Great Depression
Howard Richman, 4/11/2010

Ian Fletcher, author of Free Trade Doesn't Work: What Should Replace it and Why? had an excellent commentary in the Americnan Thinker on Friday (Protectionism Did Not Cause the Great Recession). Here's how he begins:

The debate over free trade is riddled with myth after myth. One that keeps resurfacing, no matter how many times it is discredited, is the idea that protectionism caused the Great Depression. One occasionally even hears that this same protectionism -- specifically, the Smoot-Hawley tariff of 1930 -- was responsible in significant part for World War Two! This is nonsense dreamed up for propaganda purposes by free traders, and it can easily be debunked.

Let's start by reminding ourselves of a basic fact: The Depression's cause was monetary. The Federal Reserve had allowed the money supply to balloon excessively during the late 1920s, causing it to pile up in the stock market as a bubble. The Fed then panicked, miscalculated, and let the money supply collapse by a third by 1933, depriving the economy of the liquidity it needed to breathe. Trade had nothing to do with it.

The Smoot-Hawley tariff was simply too small a policy change to have so large an effect as triggering a depression. For a start, it applied to only about one-third of America's trade: about 1.3 percent of our GDP. One point three percent! America's average tariff on goods subject to tariff went from 44.6 to 53.2 percent -- not a very big jump at all. America's tariffs were higher in almost every year from 1821 to 1914. Our tariffs went up in 1861, 1864, 1890, and 1922 without producing global depressions, and the great recessions of 1873 and 1893 spread worldwide without needing the help of any tariff increases.

He is entirely correct. Those who have studied the depression agree. Christina Romer, now Chair of President Obama's Council of Economic advisors, summarized their consensus in her Encyclopedia Britanica entry about the Great Depression:

Scholars now believe that these [protectionist] policies may have reduced trade somewhat, but were not a significant cause of the Depression in the large industrial producers.

Moreover, when evaluating the effects of Smoot-Hawley, it is important to recognize that the United States of the 1930s was the exporting powerhouse that China is today. It is never a good idea for a net exporter to induce a trade war. But now we have a trade deficit. If a trade war were to reduce that deficit, it would increase American incomes and demand for domestically produced goods and services.

We have been advocating accross-the-board tariffs on China, proportional to our trade deficit, in order to get the Chinese government to stop excluding American products from China's markets. Tariffs like that against mercantilist countries would actually increase American exports. There is no reason why we should let mercantilist countries intentionally run trade surpluses with us.

We are now dealing with mercantilist countries whose governments use tariffs, non-tariff barriers, and currency manipulations to keep out our goods and services so that they run trade surpluses with us. If we design our tariffs so that they are proportional to those bilateral trade deficits, then we force the mercantilist countries to take down their barriers to our goods.

In other words, Smoot-Hawley may have reduced U.S. exports, but properly designed tariffs today, would increase our exports!

You can look for a review of Ian Fletcher's book in a few weeks on this website!