For almost a century now historians, economist, and even the
laymen have attributed the depth and longevity of the Great Depression to
mostly the ceteris paribus effects of the Smoot-Hawley Tariff of 1930. In class we
have analyzed the effects of tariffs on the domestic economy and have concluded
that while dead weight losses occur, so too do net gains to different groups.
In his working paper of 1986 (linked as title) entitled, The
Political Economy of the Smoot-Hawley Tariff, Berry Eichengreen, refutes
the idea of blaming the depth and longevity of the biggest economic downturn in
history to solely the effects of the Smoot-Hawley Tariff and provides and
effective analysis as support.
Using an adaptation of the Mundell-Fleming Model,
Eichengreen held retaliation from foreign countries in response to a tariff imposition
constant at 0 in order to account for the disaggregated effects of the Smoot-Hawley
Tariff on the domestic economy. In doing so, he found that by using an upper-bound
estimate of Smoot-Hawley that the effect of the tariff increased GOP by 5.25
per cent, ceteris paribus. The fall in output between 1929 and 1931 was on the
order of 15 percent. This indicated that the tariff had a useful expansionary effect
which reduced the fall of domestic output which would have otherwise occurred
at approximately 25%. Contrarily, later in his analysis Eichengreen added in
the effects of retaliation to the output of the domestic economy and found that
there still existed a small possibility of domestic output increasing even with
the imposition of the tariff; therefore, the macroeconomic impacts of the Smoot-Hawley
Tariff were small.
To conclude his analysis, Eichengreen gives sufficient evidence
for an already increased display of protectionism for foreign nations prior to
the initiation of the Smoot-Hawley Tariff. This global display of protectionism
is likely more of a key factor in affecting the depth and longevity of the
Great Depression than the U.S. tariff itself. If Smoot-Hawley had significant
macroeconomic effects, these operated instead through its impact on the
stability of the international monetary system and the efficiency of the world
capital market.
Blake...great post. In high school we learned about the Smoot-Hawley Tariff when learning about the Great Depression. I think if there is any question of whether or not being open to trade helps a country, this answers it. Immediately we saw as a nation our depression worsen when we closed off from trading with other nations. On one hand it is very troubling that we see government creating laws/tariffs that completely fail and worsen our welfare drastically even with their best intentions, however on the other hand it is good that we have learned from this example and next time we will not make such a silly mistake.
ReplyDeleteWhen the Smoot-Hawley Tariff was passed in 1930, it showed some good signs at the beginning. The payrolls, contracts and industrial production were increased. However, when the retaliation happened, it did hurt U.S. economic. Moreover, we had stock market crash in 1929. Together, they worsen the Great Depression. However, in your post, it mentions that the macroeconomic impacts of the tariff were small. The key impact is the global display of protectionism. This is interesting. In the end, the laws or tariffs passed by the government still have big effects into the economy, and we can learn from the Great Depression to make the economy better off.
ReplyDeleteAs stated before, this is a prime example of how being closed off from trade negatively effects a country.The Smoot-Hawley Tariff was definitely a learning lesson for the United States, as well as many countries I'm sure. It serves as a perfect example of what not to do. Although the initial impacts of the tariff were beneficial, the long term effects were definitely not worth it. This makes me think back to earlier in the year when we were talking about autarky and North Korea. I wonder how much longer the North Korean economy can rely solely on themselves before their economy completely crumbles due to being closed off from trade with other countries.
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