Today we expect to finish the Smoot-Hawley Tariff Act as one of the examples of retaliation trading strategies from our past.  Before starting I would like to share one of my recent aquarelles. I have named it “The Shallows”. Let´s begin.

“The Shallows”. Aquarelle Painting by Eleonora Escalante 2019. Painted on watercolor paper Fabriano Aquarello-300GSM. Size: 14.7 inches x 21 inches.  If you wish to buy it, contact me, please.

Who was Smoot?

Senator Reed Smoot. Utah. Source: Public Domain

Mr. Reed Smoot was a Senator from Utah.  He was born in Salt Lake City, in 1862, and died in 1941. Smoot graduated from Brigham Young Academy. As a businessman he was engaged in several industries: Banking, mining, livestock raising and manufacture of woolen goods. His ties to the Church of Jesus Christ of Latter-Day Saints (LDS Church) were part of the legacy of his ancestors. He served himself as one of the 12 apostles of LDS Church. He became a member of the Republican Party by Utah State. When he served as a Republican Senator from 1903 to 1933, he was leading different committees (patents, printing, public lands and surveys, expenditures in the interior department and finance).

Who was Hawley?

Willis Hawley. Oregon. Source: Public Domain

Mr. Willis Chatman Hawley was born in 1864 on a farm in the old Belknap settlement near Monroe, Benton Country, Oregon. He died in 1941. He was a lawyer, professor of history and economics, and an American politician. As a Republican, he served as a member of the United States House of Representatives from Oregon from 1907 to 1933. He engaged in several committees related to rural credits, committee on Ways and Means, and he also was involved as a member of the National Forest Reservation Commission. He co-sponsored Senator Reed Smoot in 1930 to pass the famous Smoot-Hawley tariff act.

Why did Smoot and Hawley introduce the Tariff Act?

According to the US Senate website, when President Herbert Hoover became the President of the USA in 1929, he was worried about the troubled farming industry. President Hoover yearned to help the farmers, and he requested to review the tariffs on agricultural imports. He wanted to raise import tariffs´rates, to boost the drooping local farm prices. Senator Reed Smoot joined the Hawley´s initiative for further tariff hikes. The Republican protectionists chaired by Smoot-Hawley decided not just to raise some import tariff rates, but to increase industrial and other goods´ tariffs higher. Almost every industry was rewarded with its “made to order tariff”.

1028 economists asked Hoover to veto pending tariff bill. Source: The New York Times.

For 15 large months, the low-tariff Democrats and progressive Republicans who were against Smoot-Hawley initiative debated over the process at the congress. In the meantime, more than 1,000 economists drafted and signed a petition imploring President Hoover to veto the tariff act, but Hoover dismissed the supplication, and he finally signed the tariff´s augmentation on June 17, 1930.

As the economists predicted, the high tariff proved to be a defective move. It was a tragedy because it triggered “getting even measures” from foreign countries.  “Even before its enactment, U.S. trading partners began retaliating by raising their tariff rates too, which froze international trade”.

 What was the context of the Hoover Presidency?

During World War I, non-European countries increased their agricultural production. So when the war ended, European producers stepped up and continued with their “as usual” production as well.

What happens when there is an overproduction of commodities or merchandise in the world? In the case of over-supply, prices immediately fell down. This usually happens with commodities such as crude oil, coffee, natural gas, gold, wheat, cotton, corn, sugar, silver or copper.

In the USA, farming product prices declined, particularly during the second half of the 1920s. According to Thoughtco.com,  one of Herbert Hoover’s campaign pledges during his 1928 election was to aid the American farmer and others by raising tariff levels on agricultural products.

In 1929, the U.S. stock market crashed, marking the beginning of the Great Depression of the 1930s. This was the worst economic decline in American history. Here are some statistics: 9,000 banks closed between 1929 and 1933. U.S. Gross National Product was reduced in half in less than a year, it plummeted from $103 to $58 billion. And by 1933, twenty-five percent of Americans were without a job.  Hoover aimed to avoid rising unemployment by protecting domestic industries and diverting consumer demand away from foreign products.

Why did US President Hoover approve it?

Cartoon from the Washington Examiner.

President Hoover approved the Smoot-Hawley Tariff Act because there was an existing crisis, and he wanted to find solutions. He was doing the corporate strategy decision making. How can we help the USA to recover from an economic depression? What to do? And Hoover maybe thought let´s protect our local industries, by raising the taxes on US imports.  Remember, a tax on imports is called a tariff. And President Hoover thought by protecting the domestic industries, domestic businesses, and agricultural goods from foreign competition, the best way to do it was by allowing high tariff rates on international products or US Imports.

What happened next? Consequences of the Smoot-Hawley Tariff Act.

• Smoot-Hawley motivated a retaliatory Storm. The Smoot-Hawley Tariff may not have caused the Great Depression, but the augmentation of tariffs caused revenge from others. In addition to the fact that higher tariffs did not help to end the existing economic oversupply of commodities, it also kicked off more suffering. Smoot-Hawley provoked a hurricane of foreign retaliatory measures, and it became a symbol of the 1930s’ “beggar-thy-neighbor” policies, designed to improve one’s own lot at the expense of others.
• The tariff´s war contributed to a drastic decline in international trade. For example, US imports from Europe declined from a high of $1,334 million (1929) to just $390 million (1932). Meanwhile, U.S. exports to Europe fell from $2,341 million (1929) to $784 million (1932).
• As a result,  world trade declined by about 66% between 1929 and 1934. In reality, the Smoot-Hawley Tariff fostered distrust among nations, leading to less cooperation. For each retaliation measure, there was a distrust sentiment between all the nations involved.
• In addition, it led toward further isolationism of the USA in the international trading platform.
• Protectionism receded after Smoot-Hawley’s redundancies. The impact of the Smoot-Hawley Tariff was deeply sensed by the American Society. When President Franklin Roosevelt took the Presidency´s baton, he immediately exerted measures for trade liberalization.
• After the end of WWII, the US leadership pushed for the General Agreement on Tariffs and Trade (GATT, 1947).  The GATT is a direct consequence of the Smoot-Hawley Tariff Act. Through the GATT, the idea to liberalize trade by eliminating government intervention was an omnipresent truth.  GATT was here to reduce or even eliminate the instruments of trade policy such as tariffs, subsidies, import quotas, voluntary export restraints, and administrative trade policies.
• In the 90s, the World Trade Organization (WTO) was born as a result of the Uruguay Round,  to implement and guard the global trade rules of the GATT agreement. The WTO  has acted since its conception,  as a global trade policeman. Particularly, the WTO executed a significant role in the telecommunications and financial services liberalization, but still to these days has a lot of things to do in terms of enhanced protection of patents, copyrights, and trademarks.

Lessons Learned – Personal reflection

“The Shallows”. Aquarelle Painting by Eleonora Escalante 2019.

The world has become remarkably pro free-trade agreements since the Smoot Hawley Tariff Act that free trade is now so excessive, and we are reaping the consequences of the excessive greed for those involved in it. The concept of social responsibility (CSR) is insufficient to fix all our free-trade sins. And it is still so new. Michael Porter´s original models have been applied extensively to promote free trade but, oops! something was missing at Porter´s frames. The premises of ethics and integrity when doing business were forgotten.  Competition without cooperation never works.

I believe extremes never heal us. From protectionism disasters (an example is a Smoot-Hawley period) to the pure free-trade liberalization cheap costs cataclysm, we all have a difficult time in trying to find balance. The WTO has a crucial role in trying to balance the global value chain flaws. Why? Because Global Value Chains are the result of the free-trade philosophy that has not respected the environment, which has not respected workers´rights, which has not given certain rules of ethical engagement to foreign direct investments and commerce, and finally which has not imposed ethical values at the core.  As a result, too much or extreme free-trade has allowed excessive greed that is clearly demonstrated by not including ethical values in relation to:

1. The environment (climate change is a reality): Free trade was not doing anything to protect or promote a sustainable planet. How to promote sustainable development and ecological recovery without resorting to protectionism? Our current natural ecosystems are dying, and we are just waking up to realize it.
2. Workers´rights: Since free trade has sailed better with low-cost strategy industries (and their respected companies), for the sake of maximizing efficiencies and productivity, the abuse of workers’ rights is also evident.  In many developing economies, the salaries are so low, and the working conditions are similar to slavery, that workers’ basic rights are indirectly violated. Low Wages can´t help the poor to improve their conditions of life.
3. Shady Foreign Direct Investments: What happens when FDI doesn´t help the developing economies to grow? But FDI strategies are only a vacuum to gasp the developing economy local resources, at a low cost, without leaving anything sustainable for the developing economy in return. Aren´t we promoting an unfair disequilibrium?
4. Cultural respect: Free-Trade´s sustainable future depends on its capacity to respect the culture of every single local economy. Trading at expenses of losing the traditions and cultural heritage will make the world a plain boring place.

Even though the majority of the economists in the world are in favor of free trade, we can´t forget that free trade economic theories are in need to evolve for the better, not for the worst. Our commerce-trading corporate strategy models and economic frameworks need tweaks, adjustments, correcting and modifications. There are certain basic norms of respect behavior which these models have dismissed. And new improvements are required. All our economic theories must be based on ethical values that every single company, industry or country must respect, regardless of its origin, culture or religion.

If we let free trade run free,  we will end up without a sustainable planet. Again, I am not telling you to return back to the protectionism of Smoot-Hawley. But we can´t leave the things run freely free without ethics. Otherwise, we may experience climate change disasters, or future wars because of inequalities. Our planet will end up being a garbage slump. A free-trade world without ethics and love for humans´development and nature,  is like not having basic etiquette rules for living.

I would like to summarize this article as follows: Regardless of our trendy economic theory in the market, we can´t thrive in the long run without justice. One country or trading company or individual can´t be happy at the expense of another country, another trading company or another individual unhappiness.  

Next week we will continue with the Anglo-Irish Trade War (1932–1938) example.

Thank you.

Sources of information utilized to write this article:

https://www.senate.gov/artandhistory/history/minute/Senate_Passes_Smoot_Hawley_Tariff.htm

https://www.senate.gov/artandhistory/history/common/generic/Featured_Bio_Smoot.htm

http://bioguide.congress.gov/scripts/biodisplay.pl?index=H000379

https://study.com/academy/lesson/hawley-smoot-tariff-of-1930-definition-overview.html

https://www.britannica.com/topic/Smoot-Hawley-Tariff-Act

https://www.mheducation.com/highered/product/global-business-today-hill-hult/M9781260088373.html

Disclaimer: Illustrations in Watercolor are painted by Eleonora Escalante. Other types of illustrations or videos (which are not mine) are used for educational purposes ONLY.  Nevertheless, the majority of the pictures, images or videos shown on this blog are not mine.  I do not own any of the lovely photos or images posted unless otherwise stated.

Published by eleonoraescalantestrategy

Corporate Strategy Artist, San Salvador, El Salvador View all posts by eleonoraescalantestrategy