« Smoot-Hawley did not cause, or even significantly deepen, the Great Depression »

I was reading the article « Bring it all back home » on Project-syndicate, denouncing the return of a past error, protectionnism. The author argues among other things :

  • « Monetary tightening was not the only major policy error of the 1930’s; so was a retreat into protectionism, symbolized by the Smoot-Hawley tariff increases at the beginning of that decade. Historians continue to debate the centrality of the Smoot-Hawley law itself, but the subsequent tariff war certainly damaged trade and economic growth, making a bad situation worse. »

It reminds me of what I read in William Bernstein’s brillant book « A Spendid Exchange« , that tariff wars in the 1930s played a very minor role in the economic turmoil of the time.

Let me quote him :

« Between 1929 and 1932, real GDP fell by 17% worlwide, and by 26% in the USA, but most economic historians now believe that only a minuscule part of that huge loss of both world GDP and the USA’s GDP can be ascribed to the tariff wars. »

« A back-of-the-enveloppe calculation show that this must have been true. At time of Smoot-Halley’s passage, trade volume accounted for only 9% of world economic output. Had all international trade been eliminated, and had no domestic use of the previously exported goods been found, world GDP would have fallen by the same amount, 9%. Beteen 1930 and 1933, worldwide trade volume fell off by one-third to one-half. Depending on how the falloff is measured, this computes to 3 to 5% of world GDP, and these losses were partially made up by more expensive domestic goods. Thus the damage done could not possibly have exceeded 1 or 2% of world GDP – nowehere near the 17% falloff seen during the Great Depression. »

« Even more impressively, the nations most dependent on trade did not suffer the most damage. For example, in Holland, trade accounted for 17% of GDP and yet its economy contracted by only 8% in those years. By contrast, trade constituted less tan 4% of the US’ GDP, yet its economy contracted by 26% during the Depression. The inescapable conclusion : contrary to public perception, Smoot-Hawley did not cause, or even significantly deepen, the Great Depression. »

« Recently, economic historians have calculated that the tariff wars of the 1930s caused less than half of the falloff in world trade, the rest being due to the Great Depression itself, which decreased demand for trade products. »

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