Q&A:Topic back in the act again.
What is the Smoot-Hawley Tariff Act? Smoot-Hawley was an act passed by the US Congress in 1930 that significantly increased tariffs on a wide range of imports. As is tradition in the US legislature, the act was named after the senator and House of Representatives member who sponsored it, Reed Smoot and Willis Hawley.
Why is the act important? The US Congress had raised tariff rates many times before the passage of Smoot-Hawley, and by even larger margins. The difference this time was the context. The US stock market crashed in 1929, and by the following year the country was in the midst of a recession that would later balloon into the Great Depression, the worst economic downturn in the country's history. Because it raised trade barriers and prompted retaliation from abroad, some economists have argued that the act triggered the Depression. But while economists agree that Smoot-Hawley was bad policy, the consensus today is that it did not play a central role in the downturn.
So how is it relevant now? Smoot-Hawley is often dredged up in political debates as an illustration of the pitfalls of protectionism. Politicians, commentators and others have already invoked it innumerable times in the wake of the recent recession as a reason for countries to further break down trade barriers rather than retreat to domestic insularity and protectionism.
Review: Peddling Protectionism: Smoot-Hawley and the Great Depression, by Douglas A Irwin
The Smoot-Hawley Tariff Act, a piece of legislation passed by the US Congress in 1930, has long been panned as one of history's great economic blunders. It is even cited by some people as the catalyst that turned an ordinary recession into the Great Depression.
The act raised taxes on imports ranging from sugar to silk, ostensibly in an effort to protect domestic producers from cheaper foreign goods. But as the economist and historian Douglas Irwin deftly and concisely explains in his new book, the higher tariffs were of no substantial benefit to industries at home - not many faced real foreign competition - and even hurt some of the people they were supposed to help. Higher tariffs on machinery raised costs for already struggling farmers who had to import equipment. Perhaps most damaging, however, was the wave of retaliation the act sparked as countries across the globe raised trade walls against American goods, hurting the country's exports.
Nevertheless, Irwin goes on to show that Smoot-Hawley had a more muted effect on the Great Depression than is commonly supposed. The legislation was proposed during the economic boom that preceded the Depression, after all, and most US imports were duty-free even after the act's passage. Higher tariffs were unquestionably a bad idea at a time when global trade was already on the decline and domestic industries were suffering, but the Federal Reserve's failure to control the money supply and keep deflation in check were the real causes of the Depression.
A rarity among books of its ilk, Peddling Protectionism is a stellar read both as a historical narrative and an economic text.
Top 5: Top 5 US best-sellers in business and investing.
1 Reckless Endangerment, by Gretchen Morgenson and Joshua Rosner.
2 Anything You Want, by Derek Sivers.
3 Brain Rules, by John Medina.
4 Outliers, by Malcolm Gladwell.
5 The Big Short, by Michael Lewis.
As mundane as the issues at hand might sound - think of Ben Stein's famous monotonic lecture about Smoot-Hawley in Ferris Bueller's Day Off - Irwin makes them comprehensible and even enjoyable to consider, peppering his text with anecdotes and contemporary political cartoons as he unpacks the economic context that led to the act's passage.
The Quote: The philosophy of protectionism is a philosophy of war. Austrian-American economist Ludwig von Mises
