Why Smoot-Hawley is Like a Melting Glacier

The Smoot-Hawley Tariff has become a bogeyman in economics circles, a piece of misguided, Depression-era legislation that raised tariffs to exorbitant rates and choked the world trade system near to death. I was surprised, then, to find this piece in Prospect magazine, by highly regarded development expert Ha-Joon Chang, who teaches economics at Cambridge, arguing that Smoot-Hawley actually did little to worsen the Great Depression. "The '1930s: never again' story assumes that protectionism is always bad," Chang writes. "But this is not true."

I asked Jagdish Bhagwati, a professor at Columbia University, senior fellow at the Council on Foreign Relations, and one of the best-known defenders of globalization if he cared to respond. He agrees that Smoot-Hawley didn't cause the Depression, but it did "accentuate" it. "When we say today that we must avoid repeating history and succumbing to protectionism, we are basically saying that, yes, we have repeated 1929 (the crash has already occurred) but we should not go on to repeat 1930 through 1934 (i.e. spreading protectionism)."

Further, Smoot-Hawley has become a great marketing tool. "Al Gore, who could not get the Senate to ratify the Kyoto Treaty on Global warming -- they were opposed to it 99-1 under the Clinton regime --- managed to get the world to change its mind on the subject because of the melting glaciers, the penguin film and the polar bears! We free traders have Smooth-Hawley to play the same role! It is too important to be undermined by misleading argumentation."

Read Bhagwati's full response after the jump.

That the Depression was not caused by Smoot-Hawley tariff is pretty well known now, and few argue otherwise today. What we do say, however, is that the Smoot-Hawley tariff led to retaliation by several other countries -- this was greater from countries that maintained the gold standard and to a much lesser degree from those that went off it and hence could have exchange-rate devaluation do the job of diverting world aggregate demand on to themselves. Such retaliation unleashed protectionism that accentuated the depression. We can argue about how much of the spread of protectionism was such a response to the Smoot-Hawley tariff alone. But we cannot doubt the spread of protectionism, and the balkanization of world trade into preferential trading arrangements (today, that balkanization has occurred ironically due to Free Trade Agreements, as I argue in my latest book, titled Termites in the Trading System: How Preferential Agreements Undermine Free Trade). That this, in turn, disrupted world trade in a substantial way is hard to dispute, and I have never seen any plausible estimates to the contrary.

When we say today that we must avoid repeating history and succumbing to protectionism, we are basically saying that, yes, we have repeated 1929 (the crash has already occurred, and again, not because of protectionism) but we should not go on to repeat 1930 through 1934 (i.e. spreading protectionism) that will make matters worse, as in that earlier period.

To try to undermine the argument about Smoot-Hawley and protectionism's role in deepening the depression in the 1930s is to also deprive us of the one strong way in which we can appeal to the public successfully about the threat that protectionism poses and the promise that free trade holds. Al Gore, who could not get the Senate to ratify the Kyoto Treaty on Global warming -- they were opposed to it 99-1 under the Clinton regime -- managed to get the world to change its mind on the subject because of the melting glaciers, the penguin film and the polar bears! We free traders have Smoot-Hawley to play the same role! It is too important to be undermined by misleading argumentation.