Tariff Competition

An environment of tariff competition is one economic theory that explains conditions that led to the Great Depression. Following World War One, many countries faced financial instability and sought to protect their domestic economies through policies of protectionism.

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Prior to 1913, the American economy adhered to a protective system.[1] However, this changed with the passing of the Underwood Act (1913) which created the lowest tariff rates in American history in order to foster international trade and regulate revenue on imported goods. Following WWI, Great Britian sought stability through return to a protectionist policy.[2]  The United Stated responded to this shift in international economic strategy by changing its own approach to import/export management with the adoption of the Fordney-McCumber Act of 1922.[3]

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This Fordney-McCumber Act contained a number of protectionist measures; it increased tariffs of all imports, increased custom duty rates, and decrease the “free list” or items not subject to duties or tariffs.[4] This Act also provided the president authorization to arbitrarily adjust tariffs by up to 50%, based on data provided by the Tariff Commission.[5]

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In the 1930s, American tariffs continued to increase.[6] Meanwhile, the agriculture industry, which had been prosperous in the end of the second decade of the twentieth century, was greatly affected by the 1920 recession.[7] At home, the prices and exports of agricultural goods fell, European production of agricultural goods increased, and larger tariffs were imposed on American farm products by European countries, leading to widespread foreclosures of American farms.[8] Some critics of the American tariff policy felt that American farmers' economic distress was caused by the tariffs intended to protect the industry. As a result of increased tariffs, fright charges, consumer goods, and production costs increased.[9]

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In response to the American economic distress, President Herbert Hoover sought to further the protection policy of tariffs to protect agriculture and other industries from foreign competition.[10] He advocated for expansion and strengthening of the Flexible Tariff Provision. In 1928, the Smoot-Hawley Tariff Act was introduced to enhance protection of American farmers and to appease them by increasing tariffs on agricultural goods.[11]  Although the increased tariffs only accounted for a small fraction of price increase on imports there was a large impact on exports. In retaliation for the increase on international goods, other nations responded with “harsher restrictions on American imports than the U.S. imposed on theirs.”[12] Thirty-three nations protested the Smoot-Hawley act; Canada, Spain, France, and Italy responded by increasing tariffs on American goods and withdrawing their official preference for American trade goods.[13]

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If the decline in international trade was a contributing factor of the Great Depression, then it follows that expansion of international trade during the 1930s contributed to the recovery of the global economy. The Reciprocal Trade Agreement Act of 1934 recognized that the economic strategy needed to both protect American domestic interests and facilitate international trade.[14]

 

Sec. 350. (a.) For the purpose of expanding foreign markets for the products of the United States (as a means of assisting in the present emergency in restoring the American Standard of living, in overcoming domestic unemployment and the present economic depression in increasing the purchasing power of the American public, and in establishing and maintain a better relationship among the various branches of American agriculture, industry, mining, and commerce) by regulating the admission of foreign goods into the United States in accordance with the characteristics and needs of various branches of American production so that foreign markets will be made available to those branches of American production which require and are capable of developing such outlets by affording corresponding market opportunities for foreign products in the Untied States…[15]

 

By 1939, tariff rates had fallen once again to rates not seen since prior to the 1922 Fordney-McCumber Act.[16]  American exports doubled from 1933 to 1939. There are many contributing factors to the recovery of the American and Global economies after the great depression, but decreased constraints on international trade as a secondary contributing factor cannot be overlooked.[17]

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Sources:

Banks, Stephen J. “The Great Inflation: Its Origins and Its Effect on Investment Value.” Financial Analysts Journal 33, no. 3 (1977): 43–55. https://www.jstor.org/stable/4478035.

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“Extending Reciprocal Trade Agreement Act.” United States: Government Printing Office, February 10, 1937. https://hdl.handle.net/2027/mdp.39015035074379?urlappend=%3Bseq=7.

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Frieden, Jeffry A., and David A. Lake. International Political Economy: Perspectives on Global Power and Wealth. Oxford: Taylor & Francis Group, 1999. http://ebookcentral.proquest.com/lib/liberty/detail.action?docID=167041.

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Howden, David. “Peddling Protectionism: Smoot-Hawley and the Great Depression.” Quarterly Journal of Austrian Economics 18, no. 2 (Summer 2015): 232–35.

https://www.proquest.com/docview/1788718407/abstract/15CC2F3C880E4592PQ/1.

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Johnsen, Julia E. “Agriculture and the Tariff.” The Reference Shelf V (1927). https://hdl.handle.net/2027/uc1.b3428467?urlappend=%3Bseq=5.

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Koyama, Kumiko. “The Passage of the Smoot-Hawley Tariff Act: Why Did the President Sign the Bill?” Journal of Policy History 21, no. 2 (2009): 163–86. https://muse.jhu.edu/pub/122/article/270318.

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Peters, Andrew J. “The Underwood Tariff Act as a Producer of Revenue.” The Annals of the American Academy of Political and Social Science 58 (1915): 12–14. https://www.jstor.org/stable/1012843.

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Rizescu, Marilena. “U.S. Trade Strategy (1913-1930): The Strengths and Weaknesses of the International Economic Structure.” Annals of the University of Craiova. History / Analele Universităţii Din Craiova. Istorie 43, no. 1 (April 2023): 31–43. https://doi.org/10.52846/AUCSI.2023.1.03.

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Romer, Christina D. “What Ended the Great Depression?” The Journal of Economic History 52, no. 4 (1992): 757–84. https://www.jstor.org/stable/2123226.

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Rosen, Elliot A. Roosevelt, the Great Depression, and the Economics of Recovery. Charlottesville: University of Virginia Press, 2005. http://ebookcentral.proquest.com/lib/liberty/detail.action?docID=3444085.

 

Notes:

[1] Andrew J. Peters, “The Underwood Tariff Act as a Producer of Revenue,” The Annals of the American Academy of Political and Social Science 58 (1915): 12–14.

[2] Marilena Rizescu, “U.S. Trade Strategy (1913-1930): The Strengths and Weaknesses of the International Economic Structure,” Annals of the University of Craiova. History / Analele Universităţii Din Craiova. Istorie 43, no. 1 (April 2023): 34.

[3] Ibid., 34.

[4] Ibid., 35.

[5] The Tariff Commission was permanently established by the passing of the Revue Act of 1916 following decades of temporary commissions and advocacy by business groups, trade associations, and chambers of commerce. Its purpose was to investigate domestic and international economic conditions that affected industry interests and provide businesses’ advice on tariff effects on production costs and pricing. See  Kumiko Koyama, “The Passage of the Smoot-Hawley Tariff Act: Why Did the President Sign the Bill?,” Journal of Policy History 21, no. 2 (2009): 166-167.

[6] Rizescu, 38.”

[7] Jeffry A. Frieden and David A. Lake, International Political Economy: Perspectives on Global Power and Wealth (Oxford: Taylor & Francis Group, 1999),40.

[8] Frieden and Lake 40-41.

[9] Julia E. Johnsen, “Agriculture and the Tariff,” The Reference Shelf V (1927), 9.

[10] Koyama, 172.

[11] David Howden, “Peddling Protectionism: Smoot-Hawley and the Great Depression,” Quarterly Journal of Austrian Economics 18, no. 2 (Summer 2015): 233.

[12] Howden, 234.

[13] Rizescu, 38-39.

[14] Ibid., 39.

[15] “Extending Reciprocal Trade Agreement Act” (United States: Government Printing Office, February 10, 1937).

[16] Rizescu, 41.

[17] Elliot A. Rosen, Roosevelt, the Great Depression, and the Economics of Recovery (Charlottesville: University of Virginia Press, 2005), 24. Other factors that explain economic recovery include virtual elimination of unemployment due to wartime spending on the cusp of World War II in Stephen J. Banks, “The Great Inflation: Its Origins and Its Effect on Investment Value,” Financial Analysts Journal 33, no. 3 (1977): 46, and also the inflow of gold which expanded monetary supply and led to stimulus of the economy, Christina D. Romer, “What Ended the Great Depression?,” The Journal of Economic History 52, no. 4 (1992): 757–84.