31: Trade Wars and the Smoot-Hawley Tariff: What Really Happened?

Episode Summary

Executive Summary: The episode examines the 1930s trade-war era to correct common myths about Smoot-Hawley and to assess whether Trump-era tariffs could trigger a similar collapse. Doug Irwin argues Smoot-Hawley neither caused nor was caused by the Great Depression; the larger danger came from deflation, the gold standard, exchange controls, retaliation, and trade blocs. Today’s risks are narrower but still include damaging tit-for-tat retaliation and exclusion from emerging trade deals.

Main Topics: Myths and realities of Smoot-Hawley (Priority: 5/5): The hosts challenge the simplistic story that Smoot-Hawley singlehandedly caused the Great Depression, emphasizing timing and broader macroeconomic conditions. Deflation and rising effective tariff rates (Priority: 5/5): Irwin explains that falling prices raised the burden of specific duties, making tariff protection much higher than legislators intended. Retaliation and trade discrimination (Priority: 4/5): Trading partners, especially Canada, responded with higher tariffs and bloc-based preferences that harmed U.S. exporters. The gold standard as the real engine of the 1930s trade war (Priority: 5/5): Countries used import restrictions and exchange controls to protect gold reserves, turning the conflict into a broader currency-and-trade crisis. Barter and the strangling of world trade (Priority: 4/5): With foreign exchange scarce, countries resorted to barter arrangements that made commerce inefficient and distorted the global trading system. Parallels and differences with Trump-era trade policy (Priority: 5/5): The episode argues current tariffs are more limited than 1930s protectionism, but retaliation, reciprocal-tariff escalation, and exclusion from trade agreements remain serious risks.

Key Arguments: Smoot-Hawley did not cause the Great Depression; it was proposed before the crash and passed while the economy was already weakening. The tariff did not materially alter the business-cycle trajectory; the economy was already headed downward. A major rise in tariff burden came from deflation, because specific duties became more restrictive as prices fell. Retaliation mattered: Canada, the U.K., and others raised barriers or discriminated against U.S. products. The deepest trade collapse of the 1930s was driven by gold-standard constraints, exchange controls, and balance-of-payments defenses, not just tariffs. Trade blocs such as imperial preferences and Japan-centered arrangements diverted commerce away from the U.S. Today’s system is less vulnerable to a 1930s-style spiral because countries have independent central banks and flexible exchange rates. Even so, sector-specific tariffs can still provoke economically harmful retaliation and reduce access to key foreign markets. A U.S. push for reciprocal tariffs could escalate conflict rather than produce a settlement.

Data Points: Initial proposal of Smoot-Hawley: Late 1928 - Republicans first proposed the tariff before the Great Depression began. House passage of Smoot-Hawley: May 1929 - Passed before the stock market crash and before the Great Depression fully emerged. Scope of tariff increases: Over 800 products - Irwin describes Smoot-Hawley as a widespread but not across-the-board increase. Share of U.S. imports covered by specific duties: About two-thirds - Specific duties made tariffs rise automatically when prices deflated. Tariff rate peak by 1932: Almost 60% - Effective tariff burden rose sharply during the Depression years due partly to deflation. Canadian retaliation: Twice in 1930 - Canada raised tariffs against the U.S. two times in response to lost access to the American market. Financial crisis timing: 1931 - Austria and Germany experienced crises that led to exchange controls and intensified trade restrictions. Britain leaving gold standard: September 1931 - Britain’s exit helped trigger further protection and exchange restrictions worldwide. Barter example in Hungary/Czechoslovakia: 29,000 Hungarian pigs for 20,000 wagons of Czech wooden fuel - Illustrates non-monetary trade used to bypass foreign exchange controls in 1932. Britain-Denmark barter treaty: 1933 - Britain agreed to import a set amount of Danish bacon in exchange for British coal. TPP membership after U.S. withdrawal: 11 other countries - The agreement moved ahead without the United States, limiting U.S. exporters’ market access. Potential Chinese export impact: A billion dollars worth of exports - Mentioned as a possible effect of China’s anti-dumping action on U.S. sorghum.

Pivotal Quotes: "The answer there is also no." — Doug Irwin: On whether Smoot-Hawley caused the Great Depression. "The real problem there was macroeconomic, and it centered on the gold standard." — Doug Irwin: Explaining what drove the broader 1930s trade-war spiral. "This is basically a stupid process, the fact that we have to do this. But we have to do it." — Jean-Claude Juncker: Quoted to illustrate retaliatory logic behind modern trade responses.

Implications: Listeners should expect limited but real retaliation from trading partners, plus longer-term losses from being excluded from evolving trade blocs. The episode warns that while a 1930s-style collapse is unlikely, escalation through reciprocal tariffs could still damage businesses and exporters.