"And she stirs the tea with councilors...While discussing foreign trade..." — "A Well Respected Man" as performed by The Kinks
Global economic momentum is and has been slowing. And many economists fear that current U.S. tariff policies may contribute to weaker economic growth along with price increases passed on to consumers resulting in decreased discretionary spending. That more volatile markets will accompany these international trade disagreements appears almost certain.
In 1930, Senator Reed Smoot of Utah and Representative Willis Hawley of Oregon proposed similar laws placing protectionist policies (tariffs) on imports. Over 20,000 goods were affected. The legislation followed on the heels of the stock market crash.
President Hoover signed the bill in spite of dire warnings. Car manufacturer Henry Ford spent an evening in the Oval Office lobbying President Hoover to veto it. A petition signed by over a thousand economists called on Hoover to do the same. Our foreign trading partners warned us that retaliatory action would ensue if the bill became law.
Smoot and Hawley's intentions were certainly good: they were attempting to protect American jobs and food prices for American farmers. And the tariffs were labeled a success when first enacted. But the tariffs’ adverse impact on trade soon contributed to a domestic and global economic downturn.
As soon as the law went into effect, our trading partners levied similar increases on American exports. Canada slammed the U.S. with tariffs on 16 products representing 30% of U.S. exports to that country. Two years later, the depression had worsened, unemployment had tripled, food prices for American farmers were falling, and, not surprisingly, Smoot and Hawley were voted out of office. Most American economists agree that the Smoot-Hawley legislation, at the very least, contributed to and worsened the Great Depression.
Over a four-year period (from 1929 to 1933), imports decreased by 66%. Products exported by the U.S. decreased by 61%. Gross National Product tumbled from $103.1 billion to $55.8 billion. Unemployment in the U.S. went from 8% to 25%. And the global economy nosedived. Estimates are that international trade fell by 66% between 1929 and 1934.
How much of the downturn can be attributed to Smoot-Hawley's tariff legislation is a question for economic debate. That said, its negative economic impact cannot be ignored. Trade imbalances may indeed exist, but levying tariffs against countries shipping products to the U.S. leaves many of our trading partners with no alternative but to do the same.
Markets crave certainty, and the trade war economic environment is anything but certain. Many U.S. businesses are already bracing their customers for price increases on everything from washing machines to clothes to cars. What follows when folks retract their spending is often known as a recession.
Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a fiduciary, “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.