Decline in International Trade

30.3.2: Decline in International Trade

Many economists have argued that the sharp decline in international trade after 1930 helped to worsen the Great Depression, and many historians partly blame this on the American Smoot-Hawley Tariff Act (enacted June 17, 1930) for reducing international trade and causing retaliatory tariffs in other countries.

Learning Objective

Describe the effect the Great Depression had on international trade

Key Points

  •  The Great Depression and international trade are deeply linked, with the decline in the stock markets affecting consumption and production in various countries. This slowed international trade, which in turn exacerbated the depression.
  • The situation was made worse by the rise of protectionism throughout the globe, which is the economic policy of restraining trade between countries through methods such as tariffs on imported goods, restrictive quotas, and other government regulations.
  • Protectionist policies protect the producers, businesses, and workers of the import-competing sector in a country from foreign competitors.
  • This attitude was put into effect most forcibly by the 1930 Smoot–Hawley Tariff Act, passed by the U.S. Congress.
  • The Smoot–Hawley Tariff Act aimed to protect American jobs and farmers from foreign competition by encouraging the purchase of American-made products by increasing the cost of imported goods.
  • Other nations increased tariffs on American-made goods in retaliation, reducing international trade and worsening the Depression.

Key Terms

autarky
The quality of being self-sufficient, usually applied to political states or their economic systems that can survive without external assistance or international trade. If a self-sufficient economy also refuses all trade with the outside world then it is called a closed economy.
protectionism
The economic policy of restraining trade between states (countries) through methods such as tariffs on imported goods, restrictive quotas, and other government regulations.
tariff
A tax on imports or exports.

International Trade During the Great Depression

Many economists have argued that the sharp decline in international trade after 1930 worsen the depression, especially for countries significantly dependent on foreign trade. Most historians and economists partly blame the American Smoot-Hawley Tariff Act for worsening the depression by seriously reducing international trade and causing retaliatory tariffs in other countries.

While foreign trade was a small part of overall economic activity in the U.S. concentrated in a few businesses like farming, it was a much larger factor in many other countries. The average rate of duties on dutiable imports for 1921–25 was 25.9%, but under the new tariff it jumped to 50% during 1931–35.

In dollar terms, American exports declined over the next four years from about $5.2 billion in 1929 to $1.7 billion in 1933; not only did the physical volume of exports fall, but the prices fell by about 1/3 as written. Hardest hit were farm commodities such as wheat, cotton, tobacco, and lumber.

Economist Paul Krugman argues against the notion that protectionism caused the Great Depression or made the decline in production worse. He cites a report by Barry Eichengreen and Douglas Irwin and argues that increased tariffs prevented trade from rebounding even after production recovered. Figure 1 in that report shows trade and production dropping together from 1929 to 1932, but production increasing faster than trade from 1932 to 1937. The authors argue that adherence to the gold standard forced many countries to resort to tariffs, when instead they should have devalued their currencies.

Smoot-Hawley Tariff Act

The Tariff Act of 1930, otherwise known as the Smoot–Hawley Tariff Act, was an act sponsored by Senator Reed Smoot and Representative Willis C. Hawley and signed into law on June 17, 1930. The act raised U.S. tariffs on over 20,000 imported goods.

The intent of the Act was to encourage the purchase of American-made products by increasing the cost of imported goods while raising revenue for the federal government and protecting farmers. Other nations increased tariffs on American-made goods in retaliation, reducing international trade and worsening the Depression.

The tariffs under the act were the second-highest in the U.S. in 100 years, exceeded by a small margin by the Tariff of 1828. The Act and following retaliatory tariffs by America’s trading partners helped reduce American exports and imports by more than half during the Depression, but economists disagree on the exact amount.

As the global economy entered the first stages of the Great Depression in late 1929, the U.S.’s main goal was to protect American jobs and farmers from foreign competition. Reed Smoot championed another tariff increase within the U.S. in 1929, which became the Smoot-Hawley Tariff Bill. In his memoirs, Smoot made it abundantly clear:

The world is paying for its ruthless destruction of life and property in the World War and for its failure to adjust purchasing power to productive capacity during the industrial revolution of the decade following the war.

Threats of retaliation by other countries began long before the bill was enacted into law in June 1930. As it passed the House of Representatives in May 1929, boycotts broke out and foreign governments moved to increase rates against American products, even though rates could be increased or decreased by the Senate or the conference committee. By September 1929, Hoover’s administration had received protest notes from 23 trading partners, but threats of retaliatory actions were ignored.

In May 1930, Canada, the country’s most loyal trading partner, retaliated by imposing new tariffs on 16 products that accounted altogether for around 30% of U.S. exports to Canada. Canada later also forged closer economic links with the British Empire via the British Empire Economic Conference of 1932. France and Britain protested and developed new trade partners. Germany developed a system of autarky, a self-sufficient, closed-economy with little or no international trade.

In 1932, with the depression having worsened for workers and farmers despite Smoot and Hawley’s promises of prosperity from a high tariff, the two lost their seats in the elections that year.

A photo of Willis C. Hawley (left) and Reed Smoot in April 1929, standing together outside a building. It is a close-up photo.

Smoot-Hawley Tariff Act: Willis C. Hawley (left) and Reed Smoot in April 1929, shortly before the Smoot-Hawley Tariff Act passed the House of Representatives. Many historians contend that the Act worsened the worldwide economic depression.

Protectionism

In economics, protectionism is the economic policy of restraining trade between states (countries) through methods such as tariffs on imported goods, restrictive quotas, and other government regulations. Protectionist policies protect the producers, businesses, and workers of the import-competing sector in a country from foreign competitors. According to proponents, these policies can counteract unfair trade practices by allowing fair competition between imports and goods and services produced domestically. Protectionists may favor the policy to decrease the trade deficit, maintain employment in certain sectors, or promote the growth of certain industries.

There is a broad consensus among economists that the impact of protectionism on economic growth (and on economic welfare in general) is largely negative, although the impact on specific industries and groups of people may be positive. The doctrine of protectionism contrasts with the doctrine of free trade, where governments reduce barriers to trade as much as possible.

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