Smoot-Hawley Tariff Act

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1. REDIRECT Smoot–Hawley Tariff Act

Introduction

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Smoot–Hawley Tariff Act

The Smoot–Hawley Tariff Act was a United States federal law enacted on June 17, 1930, during the administration of President Herbert Hoover. It raised import tariffs on over 20,000 goods. The act is widely considered to have been a major factor in exacerbating the Great Depression. While proponents argued it would protect American industries and jobs, economists largely agree that it backfired spectacularly, leading to retaliatory tariffs from other nations and a dramatic decline in international trade.

Historical Context

The late 1920s were a period of economic instability, even before the stock market crash of 1929. American agriculture had been struggling throughout the decade due to overproduction and falling prices. Farmers, a significant voting bloc, demanded protection from cheaper imported agricultural products. Simultaneously, certain industries, particularly those facing competition from foreign manufacturers, also lobbied for higher tariffs. This push for protectionism was a continuation of a long-standing debate in American economic policy, dating back to the early days of the republic. The prevailing economic thought at the time, though now largely discredited, was that tariffs could shield domestic industries and stimulate economic growth.

The economic situation was already fragile, exhibiting early signs of a bear market and declining consumer confidence. The stock market bubble was inflating, fueled by speculation and margin buying. However, the prevailing political climate favored interventionist policies, including tariff protection. Understanding market sentiment is crucial when analyzing historical events like this.

The Legislative Process

The Smoot–Hawley Tariff Act originated with a proposal by Senator Reed Smoot of Utah and Representative Willis C. Hawley of Oregon. Smoot chaired the Senate Finance Committee, giving him significant influence over the legislation. The initial bill aimed primarily to protect the wool industry, a major industry in Utah. However, the scope of the bill dramatically expanded as other industries and agricultural groups sought tariff protection.

The legislative process was lengthy and contentious. Hearings were held, and numerous amendments were proposed. Economists, including those at the Federal Reserve, warned of the potential negative consequences of the bill, predicting that it would lead to retaliatory tariffs and a decline in international trade. However, these warnings were largely ignored. The proponents of the tariff, driven by domestic political pressures, believed the benefits of protecting American industries outweighed the potential risks.

The bill passed the House of Representatives in May 1930 and the Senate in September 1930, eventually being signed into law by President Hoover in June 1930. It was a bipartisan effort, with support from both Democrats and Republicans. The act was seen as a pragmatic solution to address the economic woes facing specific industries, largely ignoring the broader macroeconomic implications. Analyzing the political cycle can provide insight into why such a bill passed despite expert warnings.

Provisions of the Act

The Smoot–Hawley Tariff Act significantly raised tariffs on a vast range of imported goods. Prior to the act, the average tariff rate on dutiable imports was around 40%. The act raised this average to nearly 59%.

Here's a breakdown of some key provisions:

• **Agricultural Products:** Tariffs on agricultural products were significantly increased, including wheat, cotton, livestock, and dairy products. This was a direct response to the struggles faced by American farmers.
• **Manufactured Goods:** Tariffs on manufactured goods were also raised, covering a wide range of products such as automobiles, textiles, steel, and chemicals.
• **Specific Goods:** The act included specific provisions for certain goods. For example, the tariff on imported silk was raised from $0.30 to $0.60 per pound.
• **Flexible Tariff Provisions:** While largely raising tariffs, the act also included some provisions allowing the President to negotiate reciprocal tariff reductions with other countries. However, these provisions were rarely used. Understanding risk management is vital when evaluating the potential consequences of such legislation.

The sheer breadth of the act, covering over 20,000 items, made it a complex and cumbersome piece of legislation.

International Response

The Smoot–Hawley Tariff Act sparked a wave of retaliatory tariffs from other countries. Nations around the world, faced with reduced access to the American market, responded by imposing their own tariffs on American exports.

• **Canada:** Canada, a major trading partner of the United States, responded by imposing tariffs on over 300 American products.
• **Great Britain:** Great Britain imposed tariffs on a wide range of American goods, including agricultural products and manufactured goods.
• **France:** France retaliated with tariffs on American wheat, corn, and other agricultural products.
• **Germany:** Germany responded by imposing import quotas and tariffs on American goods.
• **Other Countries:** Numerous other countries, including Italy, Switzerland, and Argentina, also imposed retaliatory tariffs.

This global cycle of tariff increases led to a sharp decline in international trade. The volume of American exports decreased dramatically, and imports also fell. The act disrupted global supply chains and exacerbated the economic downturn. Analyzing global macroeconomics helps understand the interconnectedness of international trade.

Economic Consequences

The economic consequences of the Smoot–Hawley Tariff Act were severe and far-reaching.

• **Decline in International Trade:** The most immediate and significant consequence was a dramatic decline in international trade. American exports fell by 66% between 1929 and 1933. Imports also declined sharply.
• **Worsening of the Great Depression:** Economists widely agree that the Smoot–Hawley Tariff Act exacerbated the Great Depression. The decline in international trade reduced economic activity, leading to increased unemployment and business failures. The act hindered the ability of countries to recover from the economic downturn.
• **Increased Unemployment:** The decline in exports led to job losses in American industries that relied on international trade. Unemployment rates soared during the Great Depression, reaching a peak of 25% in 1933.
• **Bank Failures:** The economic downturn contributed to a wave of bank failures. As businesses failed and unemployment rose, people defaulted on their loans, leading to financial instability.
• **Deflation:** The decline in demand led to deflation, a sustained decrease in the general price level. Deflation made it more difficult for businesses to repay their debts and discouraged investment. Understanding economic indicators like inflation and deflation is critical.
• **Agricultural Crisis:** While intended to help farmers, the act actually worsened the agricultural crisis. The decline in exports reduced demand for American agricultural products, leading to lower prices and further economic hardship for farmers.

The act's failure highlighted the importance of free trade and the dangers of protectionism. Many economists now view the Smoot–Hawley Tariff Act as a classic example of a policy that backfired spectacularly. Studying historical market crashes provides valuable lessons for investors.

Criticism and Debate

The Smoot–Hawley Tariff Act remains a subject of debate among economic historians and policymakers. While the overwhelming consensus is that the act worsened the Great Depression, some argue that it was not the primary cause of the economic downturn.

• **Critics:** Critics argue that the act was a significant policy mistake that amplified the effects of the stock market crash and other economic problems. They point to the decline in international trade and the retaliatory tariffs imposed by other countries as evidence of the act's negative consequences. They also highlight the warnings issued by economists before the act was passed.
• **Defenders:** Some defenders of the act argue that it was a reasonable response to the economic problems facing American industries. They contend that the act was intended to protect American jobs and stimulate domestic production. They also argue that the Great Depression was caused by a complex set of factors, and that the Smoot–Hawley Tariff Act was only one piece of the puzzle. Employing fundamental analysis can help assess the true causes of economic events.

However, even some of the act's proponents later acknowledged its negative consequences. The act serves as a cautionary tale about the dangers of protectionism and the importance of international cooperation.

Legacy

The Smoot–Hawley Tariff Act had a lasting impact on American economic policy. It helped to discredit the idea that tariffs could solve economic problems and paved the way for a more open and liberal trade policy in the post–World War II era.

• **Reciprocal Trade Agreements Act of 1934:** In 1934, President Franklin D. Roosevelt signed the Reciprocal Trade Agreements Act, which authorized the President to negotiate reciprocal tariff reductions with other countries. This act marked a significant shift away from the protectionist policies of the Smoot–Hawley era.
• **General Agreement on Tariffs and Trade (GATT):** The lessons learned from the Smoot–Hawley Tariff Act contributed to the creation of the General Agreement on Tariffs and Trade (GATT) in 1948, which aimed to reduce trade barriers and promote international trade.
• **World Trade Organization (WTO):** GATT was later replaced by the World Trade Organization (WTO) in 1995, which continues to promote free trade and resolve trade disputes.

The Smoot–Hawley Tariff Act remains a cautionary example of how misguided economic policies can have devastating consequences. It underscores the importance of considering the broader economic implications of trade policies and the benefits of international cooperation. Analyzing trading volume alongside tariff changes can reveal market reactions.

The act is often cited as a historical example of the dangers of economic nationalism and the importance of embracing globalization. Understanding market psychology is key to avoiding repeating past mistakes. Learning about Elliott Wave Theory can provide insights into cyclical economic patterns. Applying Fibonacci retracements can help identify potential support and resistance levels in markets affected by such policies. The use of moving averages can smooth out price action and reveal underlying trends. Exploring Bollinger Bands can help assess volatility and potential breakout points. Utilizing Relative Strength Index (RSI) can identify overbought or oversold conditions. Examining MACD (Moving Average Convergence Divergence) can reveal changes in momentum. Employing Ichimoku Cloud can provide a comprehensive view of support, resistance, and trend direction. Understanding Candlestick patterns can offer clues about potential price movements. Analyzing chart patterns like head and shoulders or double tops/bottoms can help anticipate future trends. Using stochastic oscillators can identify potential turning points. Considering average true range (ATR) can measure market volatility. Applying Parabolic SAR can identify potential exit points. Employing Donchian Channels can help define breakout strategies. Utilizing Volume Weighted Average Price (VWAP) can identify areas of institutional interest. Examining On Balance Volume (OBV) can confirm price trends. Utilizing Accumulation/Distribution Line can gauge buying and selling pressure. Applying Chaikin Money Flow can measure the volume of money flowing into or out of a security. Exploring Keltner Channels can provide insights into volatility and price breakouts. Using Heikin Ashi can smooth out price data and identify trends more easily. Analyzing Renko charts can filter out noise and focus on price movements. Employing Point and Figure charts can identify key support and resistance levels. Utilizing Three Line Break charts can simplify price action and highlight trends. Examining Market Profile can provide insights into market activity and price acceptance.

Great Depression Herbert Hoover Federal Reserve International Trade Protectionism Economic Policy Tariff Reciprocal Trade Agreements Act of 1934 GATT WTO Economic History ```

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