The Smoot-Hawley Tariff Act of 1930, named for its two principal sponsors, Senator Reed Smoot and Congressman Willis Hawley, did not cause the Great Depression. It did, however, greatly exacerbate the economic crisis that began with the stock market crash of October 1929. It did this by ensuring that a trade war would occur that would badly damage all economies at least partly dependent upon the export of goods, which just so happened to include all the major economies of Europe and North America.
A tariff is a tax imposed upon the import of goods arriving from foreign countries. Foreign countries that are able to produce certain goods more inexpensively than one’s own manufacturers—in other words, domestic sources of goods may be more expensive for any number of reasons than those of other countries, making it cheaper for consumers to purchase the foreign goods than those produced locally—both support their own economies and provide the importing country less expensive goods. If domestic manufacturers, such as is the case with American steel producers, cannot compete with cheaper goods produced abroad, then they may go out of business, which means laying off their employees. This is why many Americans view cynically the benefits of free trade between this and other countries. American consumers get goods at cheaper prices, but at the expense of the domestic employment situation and, as importantly, at the expense of the survival of an industry that may be needed for national defense, as is the case with steel, which is needed for the manufacture of ships, tanks, armored personnel carriers, and many other staples of a nation’s military.
If the American, or any foreign government, wants to protect its domestic industries from foreign competition, one of the main tools they have at their disposal is the imposition of tariffs on the foreign-made goods. This raises the cost of those foreign-made goods, making them less attractive to domestic consumers. Today, a government’s ability to impose tariffs may be seriously limited by international treaty obligations designed to prevent a trade war, such as was precipitated by the passage of the Smoot-Hawley Tariff Act back in 1930. This, then, is the fundamental issue involved in discussions of tariffs. They are taxes designed to increase the cost to one’s own consumers of goods produced in foreign countries. Domestic manufacturers love tariffs because they protect them from foreign competition. Domestic consumers, including industries that use certain goods, like steel, in the production of their product, like automobiles, hate tariffs precisely because these taxes on imports increase the amount of money they have to pay for the raw materials used in the manufacture of their products.
So, getting back to the Smoot-Hawley Tariff Act, which radically increased tariffs on foreign goods, including agricultural goods the revenue of which was desperately needed by European agricultural sectors, by passing this legislation, Congress, and the president at the time, Herbert Hoover, ensured that every country with which the United States traded would suffer. When foreign exports to the United States were subjected to substantial tax increases—the new tariff rates imposed by the legislation—the costs of goods for American consumers rose while the economic situation in Europe worsened. Countries linked by the trade in goods and services are dependent upon each other, and the imposition of these tariffs hurt everybody, all over the world. Unsurprisingly, as continues to happen today, the American tariffs were countered by foreign imposition of higher tariffs on American exports to their countries, thereby exacerbating the international economic crisis and damaging American companies that depend upon overseas markets for a substantial portion of their revenue, which, in turn, increases unemployment. Everybody loses.
The Smoot-Hawley Tariff Act was intended to protect the American economy from foreign competition. What it did was precipitate a trade war that cost all involved countries dearly.
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