Tariff Policy - Protectionist backsliding



Fordney-McCumber coincided with a general rise in tariffs worldwide, as new nations formed out of the Austro-Hungarian empire sought to protect their industries. America, Britain, and other big powers called several international conferences—in Brussels in 1920 and Genoa two years later—to stop the increase in protectionism. But when these nations looked to the United States for leadership, they found—with passage of the Fordney-McCumber duty hikes—that America still elevated its domestic economy over foreign considerations in tariff policy. When the law passed, America was the world's creditor but, ironically, possessed the world's highest tariffs. Unable to negotiate down U.S. customs rates, European and Latin American nations revised their tariffs upward between 1926 and 1929. Three of the major British dominions—Australia, New Zealand, and Canada—responded likewise.

This tariff war alarmed the League of Nations, which called a world economic conference in Geneva in 1927. The representatives, including an American, resolved to terminate all prohibitions on imports. This was too bold for many nations, which attached reservations and loopholes. The U.S. delegate railed against high tariffs but focused on those in Europe, not in America. The Geneva meeting failed to stop the climb in tariff levels. Germany and Italy immediately raised tariffs against imported wheat, thereby escalating the world tariff war. In this context, the infamous Smoot-Hawley Tariff Act of 1930 (proposed in 1929) culminated the cycle of protectionism that liberal traders had feared for decades. The fallout was positive, however, for it transformed tariff policy into an internationalist instrument.

The initial trade-policy response to the Great Depression pointed in a protectionist direction under the Smoot-Hawley tariff. Historians continue to debate whether or not Smoot-Hawley represented the highest tariff in American history, worsened the Depression, or sent chills into the stock market. The large majority of twentieth-century economists, politicians, diplomats, and students of international affairs believed the worst, but there is reason to believe this perspective exaggerates the case. Research reveals that earlier tariff levels on dutiable goods regularly exceeded those of Smoot-Hawley. The Tariff of Abominations raised the average ad valorem rate (set on a percentage of value) on dutiable imports to a higher level than the 1930 legislation. Scholars should be skeptical of weighing the effect of tariff levels too heavily when trying to show their impact on the Great Depression; demand and supply conditions and currency rates had much more influence. And a close reading of stock market fluctuations and the battle over Smoot-Hawley in Congress shows no correlation between the law and the bear market. Thus, a "myth" of Smoot-Hawley arose, perpetuated by free-trading economists and Democrats seeking to wrest control of the White House by blaming the Depression—and the rise of militarism in Europe and Asia—on selfish, shortsighted, and provocative Republican tariff policy.

Still, such conclusions were beyond commentators and policymakers at the time. In reality, perception was critical, and the tariff act indicated to foreign observers that America had chosen the path of economic nationalism. In short, Smoot-Hawley's timing was atrocious. World trade, both exports and imports, plummeted in value by 40 percent and by a quarter in volume from 1929 to 1933. That spooked U.S. investments, which, along with any hopes of loans to Europe, dried up. In a vicious economic cycle, the resulting defaults by foreigners holding U.S. loans led to further instability and slumps in Europe, which were echoed in America.

Journalists exaggerated the intensity and number of protests abroad regarding Smoot-Hawley, but governments did rally against the legislation. France, Argentina, Japan, and others assailed the law as it wended its way through Congress. Thirty-eight nations urged the Senate to reject it, while American liberals warned that the high tariff was a threat to peace. Switzerland, which exported almost all of its watch and clock production, suffered a 48 percent decline in sales to the United States as a result of Smoot-Hawley rates. The Swiss called for a consumer boycott of U.S. cars and typewriters as a response. Mussolini's Italy criticized the high tariffs on agricultural imports and, in retaliation, mounted a campaign against American autos that fizzled when the Italians realized that reprisals would jeopardize their olive oil and tomato exports to the United States. Spain imposed higher duties on bicycles and wine from France, in reaction to the unconditional MFN treatment given to third countries. In effect, although there was less foreign retaliation following passage of Smoot-Hawley than claimed at the time, the impact of American protectionism came in the form of uncooperative commercial relations in the international arena.

For example, the British Commonwealth did not directly retaliate against Smoot-Hawley when it forged the Ottawa Agreement of 1932, but the discriminatory duties and quotas against non-empire sources, especially the United States, were deemed a natural outgrowth of the measure for nations seeking a quid pro quo. Under the agreement, free trade flowed between Britain and its dominions but high tariffs faced America. In 1930, nearly three-quarters of U.S. exports entered Britain free of duties, but two years later, about one-fifth enjoyed such status. Smoot-Hawley prompted the British nations to circle their wagons around imperial preferences that the United States then spent the next three decades trying to eliminate in extensive tariff negotiations. Also, Canadians erupted over American tariff hikes on farm goods during their national election. Running for reelection, Prime Minister Mackenzie King issued countervailing duties in May 1930 to bolster his image as a protector of Canadian economic interests. The international trade situation was begging for a peaceful resolution.



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