The Lessons of the Depression: Will the Tariff War lead to an economic Catastrophe
The duties imposed by US President Donald Trump have shocked the entire global economy. The collapse of the markets has become the largest since 2020, and economists predict a recession on a global scale. Analysts turn to history — the famous Smoot—Hawley Act, passed in the United States in 1930 and leading to a world war of tariffs. Why that law was passed, whether it really led to the Great Depression, and what are the similarities and differences between the then and current situation — in the Izvestia article.
Freedom with reservations
In the 1920s, the United States was the fastest-growing major economy in the world. While the European states were experiencing the severe consequences of the First World War, America was the world's technological leader. Electrification and motorization have produced tremendous productivity growth rates (only productivity growth since World War II has been faster in history), which have been converted into GDP. But the process was unbalanced: real wages lagged far behind productivity and overall economic growth. This was the fundamental reason for the stock market crash of 1929 and the subsequent economic crisis.
The key cause of the problem was the crisis of overproduction. American goods were already cramped in the market, but now, due to declining demand, they also had to compete with foreign products that were trying to find a place overseas in rapidly shrinking national economies. In the current situation, the Congress decided to act and shield the national industry and agriculture from competition in a crisis. Senator Reed Smoot and member of the House of Representatives Willis Hawley proposed their own version of a sharp increase in duties, which successfully passed both chambers due to the dominance of Republicans (although even some Democrats supported the act). Naturally, everything was sanctioned by then-President Herbert Hoover, who went to the 1928 elections with a program to increase duties on agricultural products in order to support farmers.
I must say that by that time it was possible to talk about free trade between the countries with great reservations. In the 1920s, many states were still recovering from the effects of the First World War and preferred to protect their industries, and sometimes agriculture, from external competition. Compared to 1913, the share of trade in global GDP has fallen by a third. In the United States, the average tariff rate (for those goods that were generally subject to duties) reached 40% after the adoption of the Fordney—McCumber Act of 1922. At the League of Nations conference in Geneva in 1927, the final communique called for the abolition of duties — through the expansion of international trade, it was even planned to pay off the frozen war debts (they eventually had to be forgiven), but the matter did not go beyond good wishes. The general mood around the world was to increase duties. And the United States turned out to be skirmishers in this process.
On your knees in the White House
The Smoot—Hawley Act got to Congress even before the collapse of the stock exchanges, and against the background of the crisis that unfolded in October 1929, things went much faster. In March 1930, the act was passed by both houses of Congress. For two months, the owners and top managers of America's largest companies (in particular, Henry Ford) asked Hoover not to sign the document. Some, like JP Morgan CEO Thomas Lamont, were even ready to get down on their knees. But in the end, their arguments were not heard, and the act entered into force. In the shortest possible time, the rates of import duties in the United States rose immediately by 20 percentage points (although the rates were not fixed in the law — the Senate could change them at its discretion).
The authors of the law did not take into account the fact that the United States had a fairly noticeable trade surplus in 1930. Accordingly, they could receive some significant benefit from this step only if key trading partners did not take retaliatory measures. As it was easy to guess, nothing like this happened. Many European and Latin American countries (in particular, France, Italy, Spain, and Argentina) have imposed their own duties. In some cases, boycotts of American goods began. In May 1930, Canada imposed tariffs on 16 types of goods, accounting for about a third of American exports to its northern neighbors. Later, protective duties began to be imposed by European states against each other.
The 32nd President of the United States, Franklin Delano
As a result, although the United States shielded its market from foreigners, and imports fell by almost half, this was not enough to stop the depression. The country's GDP has fallen by almost 30% in two years. The new president, Franklin Roosevelt, went to the polls with the slogan of reducing tariffs and won the race with a convincing advantage. By 1934, he had received the authority to set tariffs by presidential decree, bypassing Congress.
Globally, things were even worse. International trade in the 1930s experienced an extremely dramatic decline, declining by almost two—thirds, which, to be fair, was caused not only by tariffs per se, but also by the general contraction of the American economy, already at that time clearly the largest in the world. By 1938, it had fallen to 9% of global GDP. In some countries, the Great Depression proved to be even more difficult than in the United States, primarily because they were much poorer, and as you know, "while the fat dries, the thin will die." The tragedy of collectivization and mass starvation in the USSR was also indirectly related to the American situation. As a result, duties were reduced and gradually returned to the level of the 1920s, and after the Second World War, with the signing of the General Agreement on Tariffs and Trade (GATT, the forerunner of the WTO), they fell even lower.
Although tariffs were not the root cause of the Great Depression, economists agree that they worsened it, slowing down the recovery of the world's leading economies. In the 1930s, these countries grew only due to military spending and general technological progress, but not due to the expansion of domestic demand.
We got out of the habit of duties
The situation of almost a century ago is similar to our days, but there are many significant differences, so it is necessary to draw parallels with some caution. To begin with, international trade now has a fundamentally different scale and importance for the global economy. If in 1929 it was 14% of global GDP, then by the 2020s it had grown to 56%. However, this share peaked in the early 2010s during the 20 years of ultrafast globalization and has barely grown since then. In the United States, the value of trade with the outside world has also increased, to 25% from 10% a century ago. This is much less than the global average (paradoxically, the United States, due to the size of its economy, is a country that is relatively little affected by globalization), but it is still very significant. There is a huge range of products, primarily consumer products, whose production is spread all over the world. And this means much more severe consequences in the event of a break in production chains. In some ways, the modern economy is more fragile and finely tuned compared to the more primitive but solid economy of the first half of the last century.
The second key difference is that duties were the norm more than 100 years ago. For a while, the United States did not levy domestic taxes at all, relying solely on tariffs as a way to replenish the budget, although the Americans also introduced income taxes among the first in the world. If we look at the history of tariff rates, the last 50 years have become extremely atypical for America — on average, duties amount to about 5%. Even after the cancellation and reduction of the most extreme tariffs introduced by the Smoot—Hawley Act, the average rate was still three times higher than the current one. The economy has lost the habit of living in conditions of foreign trade duties, and protective measures can be a considerable shock to it. The Biden administration also introduced tariffs, but this was done on a point-by-point basis (for example, on electric vehicles). Everyone will have to urgently recall past experiences, but it's not a fact that it won't take many years to set up. In this sense, the situation can also be considered even more dangerous.
The third difference is that if the United States had a trade surplus in the 1920s, now, and for a long time, it has a deep deficit. In 1930, tariffs were introduced to protect local producers from an overproduction crisis. Now they are being introduced in order to return production to America, balance the trade balance, and at the same time replenish the budget by solving fiscal problems. Accordingly, the damage to the US trading partners may be even greater than it was 100 years ago. In turn, America itself will face the need to create its own production chains very quickly and almost from scratch.
US President Donald Trump
On the other hand, there are two points that somewhat reduce the dangerous drama of the situation. The point is that if the 1930 tariffs were adopted during the Great Depression, when the economy was already rapidly collapsing, it is now at a good level (at least in the United States). Therefore, a catastrophic development of events is likely to be avoided. In addition, modern supply chains are incredibly flexible and allow you to bypass duties by importing and exporting through third countries. This is manifested, among other things, in the practical impossibility of implementing all sanctions (for example, against Russia).
However, the drastic steps taken by the Donald Trump administration do have something in common with the tariffs introduced in 1930, and the effect may be comparable. Although the trend towards deglobalization took shape in the last decade, rapid and ill-considered measures can cause severe damage to the entire rather fragile edifice of the global economy.
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