Fraser Forum

History is clear—high tariffs and trade wars devastate countries

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George Santayana penned arguably the most famous quote on history, “Those who cannot remember the past are condemned to repeat it.” Yet voices around the world demand a repeat of an error so awful it lengthened and deepened the misery of the Great Depression of the 1930s.

The mistake was the horror story of the United States’ anti-trade Smoot-Hawley Act of 1930, sponsored by Senator Reed Smoot and Congressman Willis Hawley. It raised U.S. tariffs to their highest level since 1828 and sparked a devastating trade war.

Today, the populist left and right—Donald Trump, Canada’s Leap Manifesto, Labour in Britain, Marine Le Pen in France, among many others—make shrill demands that could shut down world trade. Even Hillary Clinton, once a fan of free trade, seems to have jumped sides.

Trump promises to undo NAFTA and proposes heavy tariffs, for example—25 per cent for Mexico and 45 per cent for China (and then kinda said he was only kidding). Clinton now opposes the Trans Pacific Partnership, which would bring increased prosperity to both sides of the Pacific. Not so long ago she claimed, "This TPP sets the gold standard in trade agreements to open free, transparent, fair trade, the kind of environment that has the rule of law and a level playing field,".

Canada has avoided these extremes except from the left fringe in the Leap Manifesto, which demands “an end to all trade deals that interfere with our attempts to rebuild local economies, regulate corporations and stop damaging extractive projects.” Just about anything can fall under that sky-wide umbrella.

Smoot-Hawley began small and snowballed. Initially the idea was to increase tariffs to protect U.S. farmers. But, it mutated into the snowball from hell. As it moved through congress the political game became “if you support my tariff, I’ll support yours” until 890 tariffs were raised.

The stupidly was obvious. A petition signed by 1,028 economists demanded a veto by President Herbert Hoover. Thomas Lamont, the most influential banker of his day, famously said he “almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot Tariff.”

It didn’t work and a trade war followed. Canada was a leader. Prime Minister Mackenzie King raised tariffs on products that composed 30 per cent of U.S. exports to Canada. Opposition Leader R.B. Bennett demanded more, won the 1930 election, boosted tariffs, and Canada sunk into the Depression.

Most economists believe the result was disastrous. World trade fell by 66 per cent from 1929 to 1934; U.S. exports and imports to and from Europe each also fell by about two-thirds. The causes were varied but one influential study, though it examines trade only through to 1932, estimates that the Smoot-Hawley inspired trade war caused half the decline.

Benefits? The depression worsened for farmers and workers, the supposed beneficiaries. Smoot and Hawley were defeated in their re-election bids.

The results would be worse now. At the time of Smoot-Hawley, international trade equaled only a few percentage points of GDP; in 2014, according to the World Bank, U.S. imports and exports together equal 30 per cent of U.S. GDP. Canada would be harder hit. Canadian imports and exports equal 60 per cent of GDP, about the world average.

A trade war would devastate jobs as exports nose-dive. Prices would soar as tariffs piled on import costs. The poor would be particularly hard hit on the necessities of life such as clothing.

With such clear lessons, the world did not seem condemned to repeat, at least until the current election cycle in the U.S. where the 1930s trade war began. An editorial in The Economist as recently as December 2008, the midst of the Great Recession, argued “All this [Smoot-Hawley] is history. There are plenty of reasons to think that the terrible lesson of the 1930s will not have to be learnt again.” Now Trump rages against trade and Clinton dithers.

Perhaps the second most famous quote on history is “plus ça change, plus c'est la meme.” The more things change, the more they remain the same. Hopefully common sense and lessons remembered will prevail, but we also could be on the edge of a repeat of the ruinous 1930s trade war.


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