In 1985, Ronald Reagan “jawboned” the Japanese into accepting “voluntary” restraints on exports of Japanese cars to the United States. At the same time, he drew a line in the sand between himself and U.S. congressmen calling for much stronger actions to protect the U.S. car-makers. In a weekly radio address, he vowed, “If the ghost of Smoot-Hawley rears its ugly head in Congress, if Congress crafts a depression-making bill, I’ll fight it.”
Good old Smoot-Hawley.
In all of economic history, there is no more frightening apparition than the Smoot-Hawley Tariff Act, which was signed into law by Herbert Hoover in June 1930, some eight months after the stock market crash at the outset the Great Depression. Economists are still debating causes, but most everyone agrees that Smoot-Hawley greatly worsened even if it did not cause the Great Depression.
Smoot-Hawley doubled average import duties on about two thousand manufactures and agricultural products. Other nations retaliated and world trade plummeted. American exports went from about $5.2 billion in 1929 to $1.7 billion in 1933. The loss of overseas markets for agricultural goods helped to turn much of the American heartland into a dust bowl. Many farmers defaulted on their loans, which, in turn, was a factor in leading to a banking panic.
Bad as all that was, what Reagan called the “ghost of Smoot-Hawley” has rendered a valuable service. Over the last three quarters of a century, it has stayed the hand of every U.S. president tempted to accede to populist calls for wide-ranging measures to protect domestic markets for domestic producers. Trade has steadily become more rather than less free.
But what about President Trump — the first president in modern time to flout the ghost of Smoot-Hawley? On March 1, he announced plans to slap duties of 25 and 10 percent on all imports of steel and aluminum. And then he tweeted: “Trade wars are good, and easy to win.”
Pass the smelling salts! Coming from a U.S. president, that sounds like it could be the opening shot of the next great global trade war. Or it could be something else entirely. Maybe, in his own unique way, Trump, like Reagan and other presidents before him, was engaged in the act of jawboning, the sometimes fist-shaking, opening stage of protracted negotiations — with the primary difference being the use of more colorful, or deliberately provocative, language to get what he wants.
Ever since the first of March, stock markets have fluctuated wildly — seemingly in response to moment-to-moment shifts in investor sentiment regarding the increased or decreased likelihood of a global trade war. Down stock prices went with the first announcement; then up they surged when the Trump administration announced multiple exemptions from the steel and aluminum tariffs. Stock prices fell sharply again when the president threatened to impose new tariffs on $50 billion worth of Chinese-made goods and Chinese leaders responded by vowing to place tariffs targeting $50 billion in U.S. exports to China — including soybeans, autos, and airplanes. Earlier this week, stock prices rebounded with indications that Chinese leaders may be prepared to cede ground to Mr. Trump on one of his key demands: no longer requiring U.S. companies share their technology with Chinese partners as a condition for doing business in China. Then at the end of the week came more saber-rattling — with the president again citing alleged violation of intellectual property laws and saying he might triple — to $150 billion — the amount of Chinese goods facing levies upon entering the U.S. Once again, the Chinese answered with truculent language of their own. The Dow fell 572 points, or 2.3 percent, on Friday, and all 30 blue-chip companies finished with losses for the day.
What to make of all this?
We may be wrong, but it seems to us that the president continues to practice the “art of the deal” — daringly, and not without risk, but with no desire to provoke an all-out trade war. Why would he want to throw a monkey wrench into the gears of a growing economy with business confidence at a decades-long high?
We must still ask ourselves: If push comes to shove and, once again, there is a rush by countries around the world to adopt beggar-thy-neighbor trade policies, how would that affect our state and nation? Sitting in the center of the country, would Missouri escape relatively unscathed?
A Show-Me State Perspective
If it were to happen again, there is no reason to think that a true global trade war would be any less devastating in its effects on the national economy. Back in the early 1930s, U.S. exports totaled about 7 percent of GDP; in 2016, U.S. exports amounted to 12 percent of GDP.
Missouri, as well, would be highly exposed to the adverse economic consequences of such an event.
Farms cover two-thirds of the state and employ about 400,000 people. Farm exports of soybeans, corn, and other products account for $3.6 billion, or one-quarter of Missouri’s total exports of $14.1 billion to other countries, with China as one of the prime buyers.
If every ton of steel imported into the U.S. were to cost an additional 25 percent due to tariffs, and if every ton of aluminum was to cost an additional 10 percent, the Ford, GM, and Boeing plants in Missouri would all suffer from sharply higher input costs. And if China and other countries put up tariffs of their own extending to cars, truck, and planes, it would inflict further damage in shrinking markets for their products.
Missouri farmers would fare no better. On the one hand, they would have to pay more for tractors, combine harvesters, and other machinery. On the other, retaliatory tariffs could dramatically shrink markets for their products. That was, after all, the same combination of punches that flattened the agricultural sector in mid-America during the Great Depression.
But it was not just the imposition of tit-for-tat import duties in other countries that made the Great Depression so terrible; still more, it was the absence of the benefits that flow from economic freedom in bringing forth an abundance of low-priced goods and services for all to enjoy.
The protectionist measures adopted during the Depression did not stop with Smoot-Hawley or Herbert Hoover; they continued during Franklin D. Roosevelt’s presidency and were made worse by additional policies motivated by a strong anti-enterprise animus. Roosevelt encouraged the formation of industrial cartels to limit competition and restrict working hours; he tried to raise farm income by setting quotas on production and paying farmers to remove acreage from production — even though this meant higher prices for consumers and driving farmers off the land.
Who’s Afraid of Smoot-Hawley?
At the safe distance of more than three-quarters of a century, it is hard not to think of the dreaded protectionist law as a highly instructive, if not altogether friendly, ghost. All jawboning aside, we sincerely hope that this president and others to come will remember the terrible mistake that was made in the 1930s and never repeat it.
Andrew B. Wilson, a longtime contributor to The American Spectator, is resident fellow and senior writer at the Show-Me Institute, a free-market think tank headquartered in St. Louis. Rex Sinquefield is president of the Show-Me Institute.
