Smoot-Hawley Tariff Act

Definition

The Smoot-Hawley Tariff Act is a U.S. law enacted in 1930, which implemented protectionist trade policies. Specifically, it increased import tariffs significantly in an attempt to shield American businesses and farmers from foreign competition. However, it is widely considered to have exacerbated the Great Depression due to retaliatory tariffs from other countries.

Phonetic

The phonetics of “Smoot-Hawley Tariff Act” is: /smuːt ˈhɔːli ˈtærɪf ækt/

Key Takeaways

<ol><li>The Smoot-Hawley Tariff Act was passed by the U.S. Congress in 1930 during the Great Depression. It was an attempt to protect American businesses and farmers by raising tariffs on over 20,000 imported goods to record levels.<li>The impact of the act was severe and wide-reaching. It triggered a trade war, with many foreign countries retaliating by imposing their own tariffs on U.S. goods. This resulted in a significant decrease in international trade, which aggravated the economic difficulties of the period.<li>Despite its well-intentioned aim, the tariff act is widely considered to have undermined the global economic recovery following the Great Depression. Economists and historians largely agree that the Smoot-Hawley Tariff Act contributed to the depth and length of the global depression.</ol>

Importance

The Smoot-Hawley Tariff Act is a significant piece of legislation in the history of global economics, fundamentally altering the course of international trade. Enacted in 1930 amidst the onset of the Great Depression by the United States, it aimed at protecting U.S. businesses and farmers by significantly raising tariffs on imported goods. Its importance lies primarily in its effects; it not only failed to boost the U.S. economy but triggered an international trade war as countries retaliated with their own tariffs, leading to a dramatic contraction in global trade. The negative implications of this Act set the stage for rethinking trade policies and emphasised the need for cooperation in international trade, leading to the establishment of the modern free trade system under institutions like the World Trade Organization.

Explanation

The Smoot-Hawley Tariff Act was a U.S. law that was enacted in 1930 with the aim to protect American businesses and farmers by imposing high tariffs on imported goods. During the period following World War I and during the onset of the Great Depression, many American industries were struggling due to increasing international competition. These tariffs were intended to encourage domestic production and shield American enterprises from the effects of globalization and economic turmoil by making foreign goods more expensive and less attractive to consumers.However, the legislation had consequences that extended far beyond its primary purpose. Many countries, in retaliation to the Smoot-Hawley Tariff Act, enacted their own set of high tariffs against American goods. This resulted in a significant reduction in international trade and has been heavily criticized for exacerbating the Great Depression. As such, the use of this law significantly underscores the potential negative global economic impact of protectionist trade policies. While intended to boost local industry, it can lead to trade wars and global economic downturns by disrupting the interdependent relationships in the global economy.

Examples

1. The United States Economy during the Great Depression: One of the most significant real-world examples of the Smoot-Hawley Tariff Act was its impact on the U.S. economy during the Great Depression. The Act was initially implemented in 1930, and it resulted in raising tariff rates on over 20,000 imported goods to extremely high rates. This policy damaged U.S. trade relations with other countries, causing them to implement their own tariffs in retaliation. The subsequent trade war further deepened the severity of the Great Depression.2. Impact on the Global Economy: Besides directly affecting the US economy, the Smoot-Hawley Tariff Act had a far-reaching impact on the global economy. Due to the retaliatory tariffs that other countries placed on US goods, international trade saw a dramatic decrease. From 1929 to 1933, world trade decreased by roughly 66%. This not only amplified the Great Depression worldwide, but also fostered animosity and tension between the US and other countries.3. Long-Term Reforms in US Trade Policy: The backlash and economic fallout from the Smoot-Hawley Tariff Act greatly influenced the shaping of future US trade policy. The negative effects of this Act led to a shift in the philosophy towards more free trade policies and agreements (like creation of General Agreement on Tariffs and Trade (GATT) and later the World Trade Organization (WTO)). The Reciprocal Trade Agreements Act of 1934 was one such policy change. This act gave the President the power to negotiate tariff reductions with other countries and marked a turn away from the protectionism policy represented by the Smoot-Hawley Tariff Act.

Frequently Asked Questions(FAQ)

What is the Smoot-Hawley Tariff Act?

The Smoot-Hawley Tariff Act is a piece of U.S. legislation passed in 1930 that raised import duties to protect American businesses and farmers by increasing the tax on imported goods.

Who were Smoot and Hawley?

Smoot and Hawley were U.S. politicians, Reed Smoot and Willis C. Hawley. They co-sponsored the Smoot-Hawley Tariff Act.

What was the purpose of the Smoot-Hawley Tariff Act?

The primary purpose of the Smoot-Hawley Tariff Act was to protect U.S. agriculture and industry from foreign competition by raising tariffs on imported goods during the Great Depression era.

What was the impact of the Smoot-Hawley Tariff Act?

The Smoot-Hawley Tariff Act ended up worsening the Great Depression. Many countries retaliated against the high tariffs imposed by the U.S. which led to a decrease in international trade.

What industries were most affected by the Smoot-Hawley Tariff Act?

Virtually all industries were affected by the Smoot-Hawley Tariff Act, but it particularly impacted the agricultural and manufacturing sectors.

How does the Smoot-Hawley Tariff Act relate to current trade policies?

The repercussions of the Smoot-Hawley Tariff Act serve as a lesson about the potential negative effects of high tariffs and protectionism. It remains a reference point today when discussing international trade policies.

Has there been any attempt to repeal the Smoot-Hawley Tariff Act?

The Smoot-Hawley Tariff Act was virtually reduced by 1934 due to the passage of the Reciprocal Trade Agreements Act, which authorized the President to negotiate tariff reductions on a bilateral basis. The Act has also been significantly eroded by subsequent global multilateral trade agreements.

Related Finance Terms

Protectionism
Import duties
Trade war
Great Depression
International trade policy

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