American Tariffs and a link to the Depression and War
The last time America imposed wide-ranging trade tariffs on goods entering that country it worsened the effect of the Great Depression.
They were also thought to have deepened a lack of trust with an Asian country that was conducting its own developmental state run by a militaristic government - precipitating the attack on Pearl Harbour and America's entry into the Second World War.
While academics debate just how much to blame the Tariff Act of 1930 or the Smoot–Hawley Tariff for the Great Depression, there is no doubt amongst economists it made matters worse for both America and the global economy.
Willis C. Hawley (left) and Reed Smoot just before the Smoot–Hawley Tariff Act passed the House of Representatives.
But it was the negative effect on the then-one party military state of Japan that led to bad faith and tit-for-tat measures, which resulted in a full-scale war with the United States.
The Act raised US tariffs on over 20 000 imported goods from around the world. It was only the second time in a hundred years that America had imposed such wide-ranging tariffs on its long-standing trade partners, following the Tariff of 1828.
During the latter, agricultural products were coming under pressure from European goods and like the former Tariff, it ended badly for America.
The Smoot-Hawley Tariff caused a huge drop in American exports when trading partners retaliated, similar to what China is currently doing in 2019. In the end, American imports and exports dropped by more than 50% during the Great Depression - blamed mostly on the Smoot-Hawley Tariff.
After the Act was passed and tariffs increased, it appeared briefly that the new approach was working, but this did not last. After six months, there was a rapid decline.
The American heartland had seen technological developments like mechanisation and electrification, which led to a surge in agricultural production. The macro-economic effect was to contribute to a surplus in farm produce, exceeding market demand. The overproduction was countered by Republic Senator Reed Smoot, who contended that the tariffs would stop international products arriving on American soil.
This was supposed to lead to an increase in consumption of local products. In reality, however, food imports were worth less than half of what manufactured imports were worth in total. The result was a surge in prices of important produced goods entering the United States.
Automobile executive Henry Ford spent an evening at the White House trying to convince then-president Herbert Hoover to veto the Smoot-Hawley Bill, calling it "an economic stupidity."
J. P. Morgan's chief executive Thomas W. Lamont said he "almost went down on [his] knees to beg Herbert Hoover to veto the asinine Smoot-Hawley tariff."
Threats of retaliation by other countries began with an international boycott of American products long before the bill was enacted into law in June 1930. Canada, for example, retaliated in May 1930 by imposing new tariffs on 16 products that accounted altogether for around 30% of US exports to their ally.
The tariffs also pushed Canada to forge closer economic links with England via the British Empire Economic Conference of 1932.
By 1932 both Smoot and Hawley had lost their seats in the elections when it became apparent that their tariff law had worsened conditions for Americans in the Great Depression.
Like in 2019, the economic problems of the world intersected with the American economy, and in 1931 the weak banks caused the crash to worsen. When the Creditanstalt of Austria failed in 1931, the global deficiencies of the Smoot–Hawley Tariff became apparent.
WORSENED THE DEPRESSION
US imports decreased 66% from $4.4 billion in 1929 to $1.5 billion in 1933. Exports decreased 61% from $5.4 billion to $2.1 billion. GNP fell from $103.1 billion in 1929 to $75.8 billion in 1931 and bottomed out at $55.6 billion in 1933.
Overall, world trade decreased by some 66% between 1929 and 1934.
Unemployment rose from 8% in 1930 to 16% in 1931 but economists say that the tariffs were not entirely to blame for this - structural weaknesses had crept into the world economy.
It took World War II to reverse America’s economic downturn and Monetarists such as Milton Friedman believe it was the unfettered money supply that created the Great Depression, and not the Tariffs.
But they were, undoubtedly, linked.
The tariffs also led to a tit-for-tat approach, particularly with Japan. This led directly to Tokyo deciding to attack the United States at Pearl Harbour in 1941, as the Asian nation believed the Americans would never negotiate in good faith.
Franklin D Roosevelt's administration had negotiated with Japanese diplomats in an attempt to improve relations, but Washington had warned the Japanese that their actions in China were heightening world tensions.
FIGHTING ASIAN DEVELOPMENT
It's the exact opposite today, with Washington warning Beijing that its actions in the South China Sea creating tensions with American ally, Japan. In 1940 Roosevelt signed the Export Control Act prohibiting the export of strategic goods to Japan.
The ban included aviation motor fuels and lubricants, as well as iron and steel scrap, which the Japanese had been using to build its warships and other military hardware.
Roosevelt went further, and in July 1941 froze all Japanese assets in the United States, effectively ending economic links between the two countries. Washington then pressurised both the Dutch and British to end sales of oil to the Japanese. These highly strategic minerals were core to Tokyo's industrial development and it immediately began to draw up plans to attack the American interests in the Pacific.
Today, Chinese company Huawei is regarded as one of the strategic resources with close ties to the Chinese state, and was recently banned by US President Donald Trump's administration from supplying new 5G services in America.
While trade continues between the two biggest world economies, the continued warnings by Trump that he will increasingly slap tariffs on goods from China has completely altered the complexion of world diplomacy and heightened both economic and military tensions between the two countries.
In 2018 the US launched a series of tariffs on goods from China in three tranches. First they targeted $34bn of annual imports, then $16bn more and eventually another $200bn.
China has reciprocated, leading to a dip in agriculture earnings with mid-west farmers, who are some of Trump's biggest political supporters. The World Economic Forum has warned that market good segmentation has upended world trade and could portend a serious destabilisation in global trade.
"This was most clearly observed in the case of soybeans, where US exports to China fell dramatically in 2018 after China imposed tariffs," the WEF reports.
From being the number one supplier of soybeans to China up until 2017, US exports of the commodity plunged to zero by the end of 2018. Early 2019 saw some trade activity again, but American soybean farmers now have a large surplus in storage and no chance of immediate sales, as China has replaced it supply with imports from countries like Brazil.
Sensing political damage to his possible 2020 election campaign, Trump has since signed a $16 billion aid to US farmers hurt by the trade war.