President Trump has said that trade wars are easy to win. But history strongly suggests that he’s wrong. Trade wars are, in reality, far more like the Eagles’ “Hotel California.” It is easy to get into them but very, very difficult to get out — with everyone involved suffering from the mistake.
One of the most important — and disrupting — trade wars in history began in June 1930 with the passage of the Smoot-Hawley Tariff Act. This legislation increased import duties for agricultural and manufactured goods. Broadly supported by the Republican Party, its main purpose was to raise the cost of imported items and reduce the degree of foreign competition faced by domestic producers.
Then, as now, economists warned that protectionism was a “mistake.” On May 5, 1930, 1,028 economists released a public letter declaring that Smoot-Hawley would “invite other nations to compete with us in raising further barriers to trade.” Members of Congress dismissed these views as out of touch, coming simply from the ivory tower.
Yet the economists, not Congress, proved to be correct. As they predicted, Smoot-Hawley unleashed nationalistic sentiments across the world. Immediately after the law was passed, countries as diverse as Spain, Canada and Cuba raised their duties on U.S. goods. But the most serious blow came in August 1932, when Great Britain and the Commonwealth countries established a system of imperial preferences, imposing huge tariffs on goods coming from the United States.
Although Smoot-Hawley had been introduced in Congress some weeks before the stock market crash of October 1929, its passage ended up magnifying the Great Depression, making recovery more difficult and inserting the issue into the 1932 presidential campaign.
Franklin Delano Roosevelt campaigned for lower tariffs. He asserted that freer trade was required to revive international commerce and to end the Depression. On Sept. 29, 1932, six weeks before the election, he promised to reverse Smoot-Hawley and to end the trade wars. He stated that high import tariffs had “ruined our export trade” and that they “must come down.” “We must consent to the reduction to some extent to some of our duties,” he said, “in order to secure a lowering of foreign tariff walls.”
After winning the election, Roosevelt appointed Tennessee Sen. Cordell Hull, a committed free trader who had strongly opposed Smoot-Hawley, as the new secretary of state. Hull immediately went to work establishing a “tariff truce” by securing a commitment from the other powers to initiate serious trade negotiations. The administration planned to launch its freer trade strategy at the London World Monetary and Economic Conference, a gathering where countries intended to negotiate issues related to the gold standard, currencies, debt and recovery.
But unraveling the trade war sparked by Smoot-Hawley proved to be far easier said than done.
While Hull was traveling to London, the president realized that, despite the large Democratic majority in Congress, there was not sufficient support to lower tariffs. Most members from agricultural states opposed greater foreign competition, and without their support, legislation could not pass.
That left little choice but to withdraw the topic from the conference agenda, to Hull’s dismay. It would take another year for progress to be made toward ending the trade wars. In June 1934, after the dollar was devalued by 41 percent — which won over some farm state legislators to freer trade — the Reciprocal Trade Agreements Act (RTAA) finally became law. This legislation authorized the president to negotiate bilateral trade agreements.
Yet even after the RTAA passed, Hull still faced political opposition from within a Roosevelt administration that was divided on the trade question. Hull wanted to use RTAA to move quickly and broadly and to strike deals with a large number of countries in a short period.
Others within the administration disagreed. They believed that liberalization should proceed very slowly and that deals should be signed only if the other country was willing to purchase large amounts of U.S. surplus agricultural production. These protectionists were led by presidential adviser George N. Peek — a forerunner of Trump’s hard-line trade adviser Peter Navarro — who referred to broad tariff reduction as “unilateral tariff disarmament.”
It was not until late 1935 that Hull got an upper hand in the internal White House battle. Peek resigned his post after raising Roosevelt’s ire by leaking unflattering tidbits to the press as he began to lose the internal struggle. Only then did the wheels of freer commerce begin to move.
During the first half of 1936, a full seven years after Smoot-Hawley was introduced in Congress, the United States signed three reciprocal trade liberalization agreements with major partners. In spite of this, by late 1937, tariffs were largely still far higher than they had been in 1929.
This important historical episode shows that trade wars are anything but easy to win. They are long, protracted and costly. There are seldom winners in these confrontations. They are even difficult to end once the damage becomes clear and politicians begin to try to repair it.
The White House should take notice of this history. The recently imposed tariffs on steel and aluminum have already triggered retaliation from our allies. A reduction in the volume of trade threatens to derail our economic recovery, and, if the 1930s are any indication, undoing this damage could take years.