“There are certain industries which cannot now successfully compete with foreign producers because of lower foreign wages and a lower cost of living abroad, and we pledge the next Republican Congress to an examination and where necessary a revision of these schedules to the end that the American labor in these industries may again command the home market, may maintain its standard of living, and may count upon steady employment in its accustomed field.”
No, Herbert Hoover. June 16th 1930. A day prior to the signing of the Smoot-Hawley Tariff.
Excerpt from Franklin Roosevelt’s Sioux City, Iowa Speech, September 1932:
“Now, the first effect of the Grundy tariff was to increase or sustain the cost of all that agriculture buys, but the harm to our whole farm population did not stop there.
The destructive effect of the Grundy tariff on export markets has not been confined to agriculture. It has ruined our export trade in industrial products as well. Industry, with its foreign trade cut off, naturally began to look to the home market a market supplied for the greater part by the purchasing power of farm families — but for reasons that you and I know, when industry turned its eye to the American market, it found that the Grundy tariff had reduced the buying power of the farmer.
So what happened? Deprived of any American market, the other industrial Nations in order to support their own industries, and take care of their own employment problem, had to find new outlets. In that quest they took to trade agreements with other countries than ourselves and also to the preservation of their own domestic markets against importations by trade restrictions of all kinds. An almost frantic movement toward self-contained nationalism began among other Nations of the world, and of course the direct result was a series of retaliatory and defensive measures on their part, in the shape of tariffs and embargoes and import quotas and international arrangements. Almost immediately international commerce began to languish. The export markets for our industrial and agricultural surpluses began to disappear altogether.
In the year 1929, a year before the enactment of the Grundy tariff, we exported 54.8 percent of all the cotton produced in the United States — more than one-half. That means, Mr. Cotton Grower, that in 1929 every other row of your cotton was sold abroad. And you, the growers of wheat, exported 17 percent of your wheat, but your great foreign market has been largely sacrificed; and so, with the grower of rye, who was able to dispose of 20 percent of his crop to foreign markets. The grower of leaf-tobacco had a stake of 41 percent of his income overseas, and one-third of the lard production, 33 percent, was exported in the year 1929. Where does that come in? Well, it concerns the corn grower because some of us, even from the East, know that corn is exported in the shape of lard.
How were your interests taken care of? Oh, they gave you a tariff on corn — chicken feed — literally and figuratively, but those figures show how vitally you are interested in the preservation, perhaps I had better say the return, of our export trade.
Now, the ink on the Hawley-Smoot-Grundy tariff bill was hardly dry before foreign Nations commenced their program of retaliation. Brick for brick they built their walls against us. They learned the lesson from us. The villainy we taught them they practiced on us.”
The above speeches point to the opposing views regarding trade with foreign nations. Trade policy is highly complex and contains a multitude of moving parts, none of which reacts in isolation.
Countries react to trade policy.
Currencies react to trade policy.
Interest rates react to trade policy.
Input costs react to trade policy.
Subsequently, each of these items have knock-on effects.
A breakdown in communication between nations severs alliances and provides the pretext for war. A depreciating currency is further exacerbated by expansive fiscal policies designed to arrest the decreasing demand for domestically-produced goods. Interest rates spiral higher, compensating lenders for the uncertain domestic fiscal environment, as well as the increasing inflation rate caused by higher prices. Higher input costs for manufactures raise costs for consumers, decreasing sales of manufactured goods and causing unemployment.
In the most recent Beige Book from the Federal Reserve, our recent tariff policy was addressed in the following comment:
“Prices increased in all Districts at a pace that was modest to moderate on average; reports showed upticks in inflation in several Districts. The prices of key inputs rose further, including fuel, construction materials, freight, and metals; a few Districts described these input price pressures as elevated or strong. Tariffs contributed to the increases for metals and lumber. However, the extent of pass-through from input to consumer prices remained slight to moderate. Movements in agricultural commodities prices were mixed across products and Districts. Pricing pressures are expected to intensify further moving forward in some Districts, while in others the outlook is for stable price increases at a modest to moderate pace.”
As mentioned by the Federal Reserve, tariffs affect prices for consumers and manufacturers. From the mid -1930s through this century, the US has had a pro-free trade policy executed through the reduction of tariffs and trade agreements with foreign nations. Smoot-Hawley Tariffs had driven US tariff rates to a mean high close to 60 percent. Since that time, rates have been driven down to around 5 percent.
Pro-trade policies were a reaction to the adverse effects that Smoot-Hawley produced. Two years after the Smoot-Hawley tariffs, exports and imports had fallen by 41 percent. Naturally some of the drop can be attributed to the economic collapse of the Great Depression, but the world-wide increase in tariffs were detrimental to trade.
President Trump’s proposal to remove trade barriers between allies is a welcome position and a noble pursuit. However, the complete removal of barriers may be very difficult to achieve, as the leaders of every nation have to answer to their own electorates.
The reduction of worldwide trade barriers has led not only to economic prosperity but also to a prolonged peace since World War II. As policymakers struggle to raise the standard of living for our citizens in the pursuit of fair trade agreements, let’s hope we can avoid the toxic trade environment that existed prior to the onset of World War II.