The Smoot-Hawley Tariff of 1930 was opposed by a thousand economists, but passed anyway, exacerbating the Great Depression. Now that the biggest tariff increase since 1930 is on the table, the economists are trying again. I hope we will find a more receptive audience this time.
The Independent Institute organized an “Anti-Tariff Declaration” last week that now has more signatures than the anti-Smoot-Hawley declaration, including many from top economists. One core argument is the sort you’d get in an intro econ class:
Overwhelming economic evidence shows that freedom to trade is associated with higher per-capita incomes, faster rates of economic growth, and enhanced economic efficiency.
But I thought the Declaration made several other good points. Intro econ textbooks say that tariffs at least benefit domestic producers (at the expense of consumers and efficiency), but in practice these tariffs have been mainly hurting domestic producers, because:
The American economy is a global economy that uses nearly two thirds of its imports as inputs for domestic production.
I get asked to sign a petition of economists like this every year or so, but this is the first one I have ever agreed to sign onto. Most petitions are on issues where there are good arguments on each side, like whether to extend a particular tax cut, or which Presidential candidate is better for the economy. But the argument against these tariffs is as solid as any real-world economic argument gets.
The full Declaration is quite short, you can read the whole thing and consider signing yourself here.
Tariffs are going up to levels last seen in the 1930 Smoot-Hawley tariffs that helped kick off the Great Depression:
Tariffs are taxes- roughly, a national sales tax with an exemption for domestically-produced goods and services. I think the words make a difference here- “raising tariffs on countries who we run a trade deficit with” just sounds abstruse to most people, while “raising taxes on goods bought from firms in net-seller countries” sounds negative, but they are the same thing.
Of course, in this case the plan is to raise taxes to at least 10% on goods from all other countries even if they aren’t net-sellers, and raise taxes up to 49% on those that are. This is not a negotiating tactic. We know this from the math- the new tax formula uses net imports from a country rather than a country’s tariff rates, so a country could cut their tariffs on US goods to zero today and it wouldn’t necessarily reduce our “reciprocal” tariffs at all; at best it would reduce them to 10%. We also know it isn’t about negotiating because the administration says it isn’t. Their goal, obviously, is to reduce trade, not to free it.
They say they are doing this to bring manufacturing back to America and to promote national defense. But American manufacturers don’t seem happy. Even before the latest huge tax increase, trade war was their biggest concern:
The National Association of Manufacturers Q1 2025 Manufacturers’ Outlook Survey reveals growing concerns over trade uncertainties and increased raw material costs. Trade uncertainties surged to the top of manufacturers’ challenges, cited by 76.2% of respondents, jumping 20 percentage points from Q4 2024 and 40 percentage points from Q3 of last year.
The National Association of Manufacturers responded to the latest tax increase with a negative statement; so even the one major group that might have benefitted from tariffs is unhappy. Foreign producers and US consumers will of course be very unhappy. I think Trump is making a huge political blunder alongside the economic one- he got elected largely because Biden allowed inflation to get noticeably high, but now Trump is about to do the same thing.
I also see this as a huge national security blunder. For tariffs on China, I at least see their argument- we should take an economic hit today in order to become less reliant on our peer-competitor and potential adversary. But the tariffs on allies make no sense- they are hitting the very countries that are most valuable as economic and/or military partners in a conflict with China, like Canada, Mexico, Japan, South Korea, Vietnam, India, and Taiwan (!!!). One of our biggest advantages vs. China has been that we have many allies and they have few, and we appear to be throwing away this advantage for nothing.
What can you or I do about this? Stock up on durable goods before the price increases hit. Picking investment winners is always hard, but things this makes me consider are gold, stocks in foreign countries that trade little with the US, and companies whose stocks took a big hit today despite not actually being importers. Finally, we can try nudging Congress to do something. The Constitution gives the power to levy taxes to the legislative branch, but in the 20th century they voted to delegate some of this power to the executive. Any time they want, Congress could repeal these tariffs and take back the power to set rates. I have some hope they actually will- just yesterday the Senate voted to repeal some tariffs on Canada, and more votes are planned. The alternative is to risk a recession and a wipeout in the midterms:
Most of us know about FRED, the Federal Reserve Economic Data hosted by the Federal Reserve of St. Louis. It provides data and graphs at your fingertips. You can quickly grab a graph for a report or for a online argument. Of course, you can learn from it too. I’ve talked in the past about the Excel and Stata plugins.
But you may not know about the FRED FRASER. From their about page, “FRASER is a digital library of U.S. economic, financial, and banking history—particularly the history of the Federal Reserve System”. It’s a treasure trove of documents. Just as with any library, you’re not meant to read it all. But you can read some of it.
I can’t tell you how many times I’ve read a news story and lamented the lack of citations – linked or unlinked. Some journalists seem to do a google search or reddit dive and then summarize their journey. That’s sometimes helpful, but it often provides only surface level content and includes errors – much like AI. The better journalists at least talk to an expert. That is better, but authorities often repeat 2nd hand false claims too. Or, because no one has read the source material, they couch their language in unfalsifiable imprecision that merely implies a false claim.
A topical example would be the oft repeated blanket Trump-tariffs. That part is not up for dispute. Trump has been very clear about his desire for more and broader tariffs. Rather, economic news often refers back to the Smoot-Hawley tariffs of 1930 as an example of tariffs running amuck. While it is true that the 1930 tariffs applied to many items, they weren’t exactly a historical version of what Trump is currently proposing (though those details tend to change).
How do I know? Well, I looked. If you visit FRASER and search for “Smoot-Hawley”, then the tariff of 1930 is the first search result. It’s a congressional document, so it’s not an exciting read. But, you can see with your own eyes the diversity of duties that were placed on various imported goods. Since we often use the example of imported steel and since the foreign acquisition of US Steel was denied, let’s look at metals on page 20 of the 1930 act. But before we do, notice that we can link to particular pages of legislation and reports – nice! Reading the Smoot-Hawley Tariff Act’s original language, we can see the diverse duties on various metals. Here are a few:
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