"The Historical Echo of the 'Most Foolish Tariff Bill'"

On June 17, 1930, despite widespread global opposition, U.S. President Herbert C. Hoover still insisted on signing the Smoot-Hawley Tariff Act, raising tariffs on more than 20,000 imported goods to an unprecedented level.

Thomas W. Lamont, CEO of J.P. Morgan and one of President Hoover's advisors at the time, later recalled that he almost knelt down to beg President Hoover to stop this extremely foolish bill from becoming a reality. But Hoover didn't listen, "He may not even have realized that he was opening a Pandora's box that would devour the global economy."

From that moment on, the global tariff war initiated by the United States escalated further. The international trade system disintegrated, and the economic chain broke down. Domestically in the U.S., factories closed, banks went bankrupt, and a wave of unemployment swept across the country. In the year the bill was passed, the U.S. unemployment rate was 7.8%; by 1931, it had surged to 16.3%; in 1932, it reached 24.9%; and in 1933, it climbed to 25.1%.

This move dealt a heavy blow to the already fragile international economic system: many countries retaliated with retaliatory tariffs against the U.S. In 1930, 70% of American exports to Britain were duty-free; by the end of 1931, this figure had dropped to 20%. From 1929 to 1932, the total amount of U.S. imports and exports plummeted by nearly 70%; exports fell by 49%, and imports by 40%. Between 1929 and 1933, global trade fell by 26%. It wasn't until the late 1930s that international trade did not recover to its 1929 levels.

Contemporary economists generally agree that the Great Depression was so severe and prolonged largely because the Smoot-Hawley Tariff Act spread America's domestic economic困境 to the world, and the negative impact of the resulting international economic and trade situation flowed back to the U.S., ultimately leading to a global economic and financial crisis.

Some economists also believe that although the bill was passed in 1930, discussions about it had been ongoing for a long time, causing strong unease in the capital markets. To some extent, this was also one of the key factors that led to the great stock market crash in October 1929 and subsequently opened the序幕 of the Great Depression.

In his new work, "On America: A History of American Diplomacy and Foreign Policy," Robert Zoellick, former U.S. Deputy Secretary of State and former World Bank president, provides a detailed account of this historical episode.

Zoellick cites historical records stating that approximately 65 countries protested the new tariff bill, but "Congress never seriously considered the foreign reaction to the bill." For example, reviewing the 20-page "debate record on tomato tariffs" in the Congressional Record reveals that "almost no one mentioned what kind of international impact Congress's actions might bring." The author complained: "For most of the 1940s and 1950s, the U.S. was cleaning up the mess left by the 1930 trade bill in international trade."

Zoellick repeatedly emphasized that he is "a supporter of free trade" and stated that "I firmly believe that free trade is a good thing. Implementing tariff barriers will increase costs, reduce productivity, and add resistance to the operation of the economic system." He also clearly expressed his concerns about the current U.S. tariff and trade policies: "In my view, the advantage of the U.S. has always been its openness, not only to goods, but also to capital, ideas, and talent."

Zoellick's diplomatic career spanned three decades at the turn of the century, serving under Presidents Reagan and the two Bushes. He was one of the most core advisors in the Republican Party during the post-Cold War era. Perhaps based on years of experience in the fields of economics, finance, and diplomacy, compared to other diplomats, he paid more attention to the relationship between trade policy and diplomatic strategy. In his view, tariffs and trade policies are not just "one component" of U.S. foreign policy strategies, but "an extremely important component," especially for a country like the U.S. that bases its foundation on trade.

Tariffs and U.S. policy have been intertwined since the founding of the nation. The Boston Tea Party, which sparked the American Revolutionary War, was closely related to changes in tariff policies. Today's tariff policies have once again become a focal point in U.S. foreign policy. "Americans do not only see it as a way to gain economic benefits, but also believe that with the establishment of new trade rules, the international system will also change accordingly," Zoellick believes that from trade protectionism during the Great Depression to technology export controls during the Cold War, economic and trade activities have always played a crucial role in U.S. diplomacy.

In his book, Zoellick cites the views of Douglas Irwin, an economics professor at Dartmouth College, dividing U.S. trade policy into three stages, each marked by the primary goal of Congress at the time, namely "revenue," "restriction," and "reciprocity."

In the "revenue" phase, the U.S. almost entirely relied on tariff revenue to fund the new government and pay off the huge loan interest incurred during the American Revolutionary War (1775 to 1783). During this period, Alexander Hamilton, one of the Founding Fathers and the first U.S. Treasury Secretary, proposed basic principles including protective tariffs, export restrictions, direct government subsidies for target industries, tax breaks for manufacturing investments, and providing public facilities, which laid the main policy framework for future developments in protectionist policies.

The Civil War (1861 to 1865) ushered in the next phase, the restrictive trade policy stage. At this time, the North urgently needed income to support war expenses, so Congress raised the average tariff on imported goods to about 50%. This tax rate level remained largely unchanged until the end of the 19th century.

By the late 19th century and early 20th century, the global economy was undergoing an overall adjustment, and the domestic trade situation in the U.S. was also changing. Traditionally, American farmers, particularly cotton and grain growers as well as some livestock producers, were heavy dependents on exports. Later, large American manufacturers also became net exporters, advocating further reduction of tariffs to support exports. However, most small manufacturers disagreed with their views.

For a long time, neither side gained a significant advantage. Until Ida Tarbell, a very famous investigative journalist at the time, published an article criticizing rising prices, calling "tariffs are the fat in the bowls of corrupt politicians and special interests" and "raising the cost of living for labor families," public opinion began to lean toward free trade.

Woodrow Wilson, the 28th U.S. President, also heard these calls. In 1913, the Underwood-Simmons Tariff Act was promulgated, cutting the average tariff on imported goods from 40% to 27% and adding many goods to the exemption list.

However, this round of tariff reduction policy did not last long.

In 1920, the Federal Reserve tightened credit, triggering severe deflation and economic decline. Zoellick complained that the U.S. Congress's response to this was "once again pulling out their most familiar emergency solution" - increasing tariffs.

However, in his view, the greater impact of this tariff hike was that it left an important "loophole" for future operations by the U.S. government: at that time, Congress collaborated with Secretary of State Charles Evans Hughes to pass a more flexible tariff clause, attempting to allow the president to adjust rates based on experts' calculations of "production costs." Although this policy proved unfeasible later, it created an important precedent, allowing Congress to delegate the power to adjust tariffs to administrative institutions. This authorization was supported by the Supreme Court in 1928.

Then came the infamous Smoot-Hawley Tariff Act, which was thrown into the "historical trash heap" four years later in June 1934.

Many experts believe that Franklin D. Roosevelt, the 32nd U.S. President who began his first term in 1933, has been significantly underestimated in American trade history. Although Zoellick did not give a positive response to this evaluation, he emphasized a detail in his book:

On February 28, 1934, then U.S. President Roosevelt convened Vice President, Secretary of State, Democratic leaders in both houses of Congress, the Secretary of Agriculture, and a few others to discuss a new draft. The proposal of the new draft was "bold and simple," granting administrative agencies the authority to adjust import tariffs up or down by up to 50% through trade negotiations as stipulated by the Smoot-Hawley Tariff Act. The implicit premise of this draft was "the authorization of Congress to the President," which allowed the executive branch to bypass the functions of the Senate. Moreover, Congress only needed to vote once, as this new power was unlimited in time, giving the president tremendous authority through this decree.

In 1934, the Reciprocal Trade Agreements Act was passed. "This innovation brought about a huge change in U.S. trade policy. Since then, most U.S. presidents could refer to this precedent when formulating trade policies, combining the goals of foreign policy and economic policy." Zoellick believes that for a long time thereafter, the focus of U.S. trade policy shifted from "setting tariffs ever higher" to "reducing barriers through agreements." Thus, U.S. trade policy entered the third phase - "reciprocity."

This is the outline of Zoellick's reorganization of U.S. tariff and trade policies combined with his views and those of several experts. He frankly evaluated it as "looking left and right," but in fact, it was merely a "pragmatic response to the situation at the time."

Looking at U.S. trade policy and even the entire diplomatic strategy, the U.S. often swings between realism and idealism, isolationism and "cosmopolitanism," trade protectionism and free trade. "But it can swing, thanks to that pragmatic rope."

Source: Economic Daily

Author: Han Xu

Original Article: https://www.toutiao.com/article/7492251637042512423/

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