Are we doomed to repeat the 1930s?

published 11 December 2016

823-Hoover-1200 — Herbet Hoover: let's hope Trump doesn't copy him

Herbert Hoover's protectionist tariffs led to a global depression, political extremism and war. Simon Wilson looks at what Donald Trump should learn from the mistakes of the 1930s.

What was Smoot-Hawley?

Under the Smoot-Hawley Tariff Act that came into force in 1930, US president Herbert Hoover imposed destructive import duties on more than 20,000 goods. The tariffs had their origins in farming. Hoover had served as commerce secretary under his predecessors, Warren Harding and Calvin Coolidge, in the 1920s, and he fostered regional banks that made preferential loans to farmers.

Partly as a result of this easy lending, overproduction cursed US farmers with low prices for their crops, causing them to demand import protection. They found their champions in Senator Reed Smoot of Utah and Representative Willis Hawley of Oregon.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

What happened?

The tariff act expanded way beyond farming. After the shock of the 1929 crash, US industry and labour demanded protection too and both Hoover and Congress agreed, despite opposition from Henry Ford (who called the tariffs "economic stupidity") and many others. In the end Smoot-Hawley covered 20,000 items, and pushed the average tariff on dutiable goods from an already hefty 25% to a wrecking-ball 50%.

Inevitably, other countries retaliated, and world trade crumbled. Between 1929 and 1933 US exports crashed from $5.2bn to $1.7bn, and millions of jobs were annihilated. Many economists consequently regard the Smoot-Hawley tariffs as an act of crazed self-harm that helped turn what might have been a short US recession into an era-defining depression that sowed the seeds of political extremism and accelerated the march to world war.

What are the parallels now?

Herbert Hoover, meet Donald Trump another superwealthy businessman committed to trade protectionism as a way of advancing US interests. The financial markets' calm reaction to Trump's victory suggests they believe his promise of a massive fiscal stimulus, but think that his threats to tear up the North American Free Trade Agreement (Nafta) and launch a trade war against China "are mere politicking; worthless promises that he intends to renege on".

Yet the reality is that the "greatest question now facing the world" is whether Trump will repeat the "act of vandalism" that was Smoot-Hawley, or whether he pulls back from the brink, says Allister Heath in The Daily Telegraph. "Everything else about his presidency is a minor issue in comparison".

So what are Trump's plans?

As is clear to all by now, Donald Trump's plans for anything are a moveable feast of bombast, half-truths and late-night tweeting. But in terms of concrete proposals, Trump has promised to withdraw from the Trans-Pacific Partnership and pledged that within the first 100 days of his presidency the US will label China a currency manipulator (meaning that he will formally designate it as a country that artificially depresses its currency to gain an unfair trade advantage).

That would give the president the authority to start a process leading to direct trade controls. And more broadly, within 100 days he has vowed to "identify all foreign trading abuses that unfairly" affect American workers and "use every tool under American and international law to end those abuses immediately".

What might that mean in practice?

The best-case scenario, argues Neil Irwin in The New York Times, is that Trump will pursue "an assertive stance within existing institutions". He might renegotiate the 23-year-old Nafta, bring cases to the World Trade Organisation (WTO) for resolution, and use targeted duties as he thinks appropriate. A second scenario, in which Trump places broad-based tariffs on goods from a given country, would be far more risky, provoking swift and painful retaliation from trade partners.

Trade wars would cause significant damage to the US, the global economy and financial markets. Worst of all, says Irwin, would be an outcome in which the US "upends" the world economic order altogether tearing up Nafta and withdrawing from the WTO, both threats made by Trump on the campaign trail.

Any grounds for cautious optimism?

Some. Billionaire financier Wilbur Ross, an early Trump supporter now nominated as commerce secretary, reassured the US media that "there aren't going to be any trade wars". Ross, 79, more of a pragmatist than an ideologue, claimed that Trump's threat to slap a 45% tariff on Chinese imports had been "misunderstood".

He suggested that it was a negotiating tactic, and in practice it would be dependent on whether China's currency was unfairly undervalued by 45% a remote prospect (see below). That may offer some reassurance. But Trump has been consistent on one thing: the US has been getting a raw deal from its major trading partners. The lengths he is prepared to go to redress that could have huge consequences for the world economy.

Is China fiddling its currency?

A key early test of the intentions of America's new president will be his decision on whether he does indeed label China a currency manipulator. While doing this might have been a defensible move a few years ago, almost all economists agree with the US Treasury Department's assessment that China cannot currently be accused of artificially depressing its currency, argues Gavyn Davies in the Financial Times.

The International Monetary Fund recently judged the renminbi to be fairly valued, while officials in the Obama administration have noted that Beijing's most recent interventions in the currency markets have been aimed at slowing a market-driven fall in the renminbi's value. That's the opposite of what it has long been accused of and is arguably to America's benefit. So, if Trump were indeed to take this "reckless" step, it would be a "dangerous" and ominous move.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.