Worst. Tariffs. Ever

Thomas Klinger

In the Planet Money podcast titled Worst. Tariffs. Ever the show starts off with the news of Trump’s new tariffs on steel and aluminum before discussing an important historical event in the history of tariffs in America, the Smoot-Hawley Tariff Act. Though the podcast says this might be boring for some, mentioning the amusing scene from Ferris Bueller’s Day Off of the boring teacher using the Smoot-Hawley Tariff in his lesson, it is also a great lesson in unintended consequences. The impetus for Smoot-Hawley came in the late 1920s at a time of great economic growth for America with new industries creating new jobs, however the farming sector was being left behind in this growth. In an otherwise good economic climate politicians looking for an issue to campaign on seized on the idea of protecting American farmers from foreign competition. In the 1928 election Hoover and the Republicans won and went about enacting their promises to protect farmers by raising tariffs and the two representatives in charge of tariff policy lent their names to the bill, Smoot and Hawley. The bill was originally only meant to protect the two industries most threatened by foreign competition which were sugar and wool. However since the bill was being passed through Congress other representatives in a process known as log-rolling refuses to vote for the bill until other industries important to their state or district also got their own tariffs. This process got out of hand with thousands of industries getting their own tariffs put into the bill even industries which probably did not even need them such as goldfish farms.

Tariffs have always had unintended consequences associated with them such as the downstream effect by which tariffs enacted to protect one industry hurt other industries and consumers related to the initial industry being protected and with the Smoot-Hawley Tariff these unintended consequences were as large and far reaching as the bill itself. An example of these unintended consequences is found in the example of the American egg industry which also got a protective tariff raise on foreign eggs from eight to ten cents, in response Canada raised their tariff on American eggs from 3 cent to ten cents to match it. This was disastrous for the American egg industry which had been making a lot of money off of its exports and the amount exported to Canada fell from a million dozen to 13 thousand dozens after the new tariff rates. Other countries also enacted counter-tariffs specifically targeted against America to punish it and even formed trading blocs to better organize their actions against America. The legislators of Smoot-Hawley had not even considered that this would happen regarding Smoot-Hawley to be mere domestic legislation which would not have international consequences even though they had been warned by a thousand economists in a public letter about the potential downfalls of tariffs. During this time the world was also going through the Great Depression which while Smoot-Hawley did not cause the Great Depression it certainly did not help. After World War Two America spent decades undoing the effects caused by the Act having to negotiate to lower tariffs and resulting counter-tariffs and the Act itself had become a cautionary tale against politicians who argued against free trade such as Ross Perot debating Al Gore over NAFTA. However finally winding back to the start of the story and how Trump can raise these tariffs without the approval of Congress ties back into the unintended consequences from Smoot-Hawley. Congress having seen the bad effects from Smoot-Hawley and how their log-rolling contributed to it decided to give up their tariff powers to the executive branch to stop this from happening in future. Economists however still hold the view that even relatively narrow tariffs will still hurt downstream industries and invite counter-tariffs which will hurt trade.

One of the Big Ideas from the course that comes into play is that of unintended consequences and unacknowledged assumptions. The politicians who voted for Smoot-Hawley assumed that the bill was simply an internal political decisions which would pass by unnoticed by the world at large. With the bill however many former trading partners started to punish American trade hurting the industries the Act meant to protect and when in reaction to these negatives effects Congress gave up its powers to the executive branch they might have unintentionally given power for a new Smoot-Hawley type trade war being started by the move which sought to prevent another one.