Smoot-Hawley Tariff

The Smoot-Hawley Tariff was a misguided piece of American legislation passed in June 1930 that raised tariffs on thousands of imported goods. Intended to protect American workers and farmers from foreign competition, it instead triggered a global trade war. Other nations retaliated with their own tariffs, international commerce collapsed, and the Depression was deepened. It is widely regarded as one of the worst policy mistakes of the twentieth century.

The political context and the intent

In 1929, as the stock market crash triggered the Great Depression, American farmers and manufacturers faced falling prices and rising competition from imports. Agricultural interests, particularly powerful in the Senate, lobbied for higher tariffs on agricultural products. Once those were granted, industrial interests demanded tariffs on manufactured goods as well.

The legislation that emerged was massive in scope. The Smoot-Hawley Tariff imposed or raised tariffs on over 20,000 products, ranging from agricultural commodities to industrial goods. The intent was clear: protect American workers and farms from foreign competition. The idea was that if foreign goods were made expensive by tariffs, Americans would buy American-made products instead, and factories would keep running.

In principle, this is not irrational thinking. In practice, it overlooked a crucial point: other countries would retaliate.

The retaliation and the collapse of trade

Almost immediately, other nations announced counter-tariffs. Canada, the largest trading partner of the US, imposed retaliatory tariffs on American goods. France, Germany, Britain, and dozens of other nations followed suit. Within 18 months, more than 25 countries had levied retaliatory tariffs.

The result was catastrophic for global trade. International commerce had been declining since the stock market crash, but Smoot-Hawley accelerated the collapse. US imports fell by 66% between 1929 and 1934. US exports fell by 61%. Other countries saw their exports to America disappear. American exporters found their markets closed off by foreign retaliation.

What was supposed to protect American jobs instead cost them. The factories that were supposed to keep running faced collapsed demand. Unemployment soared. The Depression deepened.

The economic logic and the lesson

Economists quickly saw the flaw. Tariffs cannot create jobs if trading partners retaliate and your export markets collapse. The assumption that America could impose high tariffs in isolation, without affecting its own exporters, was naive. In a world of trading partners, any tariff raises the cost of imported goods but invites retaliation that damages your own ability to sell abroad.

Moreover, the tariffs raised prices for American consumers. Farmers, though protected from foreign competition in some sectors, faced retaliatory tariffs on their own exports, particularly agricultural products bound for Europe. Industrial workers, though protected from cheap foreign goods, faced higher prices for inputs and for consumer goods.

The lesson and the policy pivot

Smoot-Hawley became, for economists and policymakers, the canonical example of how protectionism backfires. It convinced a generation of policymakers — at least in America and Britain — that tariffs and trade wars were economically destructive.

After World War II, the Bretton Woods system and the General Agreement on Tariffs and Trade (GATT) were designed explicitly to avoid a repeat of Smoot-Hawley. The principle was clear: countries would gradually reduce tariffs in coordinated fashion, so that no country would be put at a disadvantage if others retaliated. This regime of trade liberalization lasted nearly 70 years and was a significant engine of prosperity.

Modern relevance

Smoot-Hawley is invoked repeatedly whenever policymakers consider protectionist measures. The fear is always that modern tariffs will trigger a repeat of the 1930s trade war and Depression. This fear — whether justified or exaggerated — has made Smoot-Hawley one of the most-referenced cautionary tales in economic history.

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