Manual original MARK: Fan Linlin
Background: On June 15, 2018, the United States announced a 25% tariff on Chinese goods worth USD 50 billion. The topic of trade war has not stopped, and now the wolf is really coming. No matter what the outcome of this matter is, it will affect the people of both countries. So, I can’t help but wonder how trade wars in history started? How it affects society and every ordinary person.
coincides with the Dragon Boat Festival, and I have devoted a lot of time to it. This article uses the Smoot–Hawley Tariff Act of 1930 as a guide to share with you what you learned about the last trade war during the Dragon Boat Festival.
The Smoot-Hawley Tariff Act
The English name is the Smoot–Hawley Tariff Act, which is a tariff bill signed by US President Hoover in 1930. After some tossing, I found the full text of the bill. Interested friends can search for [19 U.S.C. 4 - TARIFF ACT OF 1930] on the US GPO website. Looking at the hundreds of pages of all-English PDF made my head hurt, but I only read a few pages. However, its main content is to impose unified tariffs on 20,000 types of goods. As can be seen from the figure below, the bill increased the overall tariff level from 40% to about 60%.
Although the background of the times is different, how did trade protectionism with such a large scope and such high tariffs pass?
Background of the times when the bill was passed
In the early 1820s, 60% of Americans lived in farm communities, and American agriculture employed at least 40% of the labor force. But by 1930, about 25% of the U.S. population worked in agriculture.
From 1915 to 1918, due to the outbreak of World War I, farm product prices rose sharply. The combination of short supply and high food prices has led to massive agricultural investment. Farmers use debt to increase leverage to increase agricultural investment, purchase land, and expand food production. But when World War I ended and Europe returned to production levels, grain prices returned to normal levels. U.S. farmers, already highly leveraged, are at risk of bankruptcy this time.
Farmers are facing the threat of cheap agricultural imports, and U.S. lawmakers want to protect U.S. farmers. Congress introduced bills hoping to support agricultural prices or subsidize exports, but then-President Calvin Coolidge vetoed these bills.
So members of Congress changed their strategy. They sought to control agricultural imports by raising tariffs on agricultural products. The sponsors of the 1930 Tariff Act were Congressmen Willis Hawley and Reed Smoot. Reed Smoot wanted to protect the sugar beets in his home state of Utah. As the bill passed through Congress, each legislator wanted to increase the protection of his own state's industry. Finally, by 1929, the tax list of the bill had reached as many as 20,000 imported products. Far beyond the scope of agricultural products.
Economists, entrepreneurs and the media at the time consistently opposed the bill. Because it will inevitably hinder international trade and will inevitably trigger counterattacks from trading partners. At the same time, increasing import tariffs will increase the price of imported products, increase KPI, and reduce people’s purchasing power.
Republican Party's Protectionism Gene
The Republican Party has been leaning towards protectionist tariffs since its founding in the 1850s. The party has the support of manufacturing interest groups in the Midwest and Northeast of the United States. Manufacturing generally believes they will benefit from high tariffs on foreign imports. The Republicans performed well in the 1928 election, winning 30 seats in the House of Representatives, giving the Republicans a final advantage of 267 to 167. At the same time, he won 7 Senate seats, 56 to 39.
After President Hoover was elected, he quickly initiated the formulation of a tariff bill. On May 28, 1929, the bill quickly passed the House of Representatives by 264 to 147. However, the bill was not passed in the Senate when the legislative work ended in November 1929 because some Republican senators did not support protectionist tariffs.
In the spring of 1930, economic recession was inevitable. The advent of the Great Depression and the rise of a protectionist atmosphere gave the bill key votes. Finally, on June 3, 1930, the bill passed the Senate by 44 to 42.
Although US President Hoover was worried that the tariff bill would lead to retaliation from trading partners, he believed that the "principles of fair trade" promised in the campaign should be adhered to. The bill was finally passed on June 7, 1930.
History keeps repeating itself. Now Trump is also launching a trade war based on the "principle of fair trade". Trump also hopes to fulfill his campaign promises. And House Republicans currently lead 241-194.
But one thing I discovered is that many people think that the passage of the tariff bill caused the stock market crash. But the tariff bill was actually passed in June 1930, and the stock market crash occurred in October 1929. Of course, it may be that the market expects that the bill will have a high probability of being completed as legislation after it passes the Senate.
The impact of the Smoot-Hawley Tariff Act
1. Retaliation by trading partners
In May 1930, Canada added tariffs on 16 products from the United States, accounting for 30% of U.S. exports.
The retaliation of the trade war can be understood from another perspective, which is the art of negotiation. Normal cooperation or negotiation is nothing more than finding the common denominator of the best interests and demands of both parties through various trials and exchanges, and finding the moral high ground. However, the imposition of unjustified tariffs destroys the possibility of negotiation and leaves no room for opponents. The other side has no choice but to launch tariff retaliation.
2. Impact of import and export
U.S. imports fell by 66%, from 4.4 billion USD to 1.5 billion
U.S. exports fell by 61%, from 5.4 billion USD to 2.1 billion
GNP: 103.1 billion in 1929, 75.8 billion in 1931, 55.6 billion
in 1933. European imports: 1.3 billion in 1929, 320 million
in 1932. Exports to Europe: 2.3 billion in 1929, 784 million
in 1932. Global trade shrank by 66%
3. Unemployment rate
The direct result of the economic downturn is the unemployment rate. The figures below show the unemployment rate data of the United States and Germany during this period. In addition to affecting the lives of ordinary people, unemployment has the most direct impact of threatening social stability. Moreover, it arouses public dissatisfaction and suspicion about the existing system. The economic downturn is not a disaster, the unemployment rate of nearly 25% is a disaster.
4. Extreme ideological trends
When up to 25% of the people in a society are unemployed, the society will inevitably be in a stage of turmoil. The dissatisfaction and confusion of the people have given opportunities to political speculators. The high unemployment rate brought about by the Great Depression also gave rise to extremist ideas.
All governments that came to power during this period were bound to shout slogans to solve the unemployment rate. But different countries have different choices, and different countries have different results. The choice for the United States was Roosevelt's New Deal, which stimulated the economy by increasing government investment and increasing government deficits. Germany's choice is to transfer conflicts externally and embrace nationalist sentiments of revenge.
Why did societies that were all democratic systems at that time make completely different choices? I personally think there are two reasons, public sentiment and political stability.
Public sentiment, after Germany failed in World War I, signed the Treaty of Versailles. In addition to political inequality, Allied reparations also overwhelmed the German economy. The coordinating country's reparations took away Germany's gold reserves and plunged the German mark into hyperinflation. It is conceivable that the German people were dissatisfied with the Treaty of Versailles and the European system at that time.
To sum up, the overall economic and political environment is a comprehensive result of the influence of multiple factors. Not all of the above can be attributed to the influence of the Smoot-Hawley Tariff Act. Moreover, before 1930, the commodity tax rate was generally around 40%. However, the impact of the tariff bill cannot be understood solely from the perspective of tax rates. If the tariff increase has reasonable and normal reasons and is accepted by trading partners, that is another matter. Therefore, the impact of the Smoot-Hawley Tariff Act was to launch the trade war at that time, which caused a sharp reduction in international trade, and after the onset of the Great Depression in 1929, it had a worse impact on economic expectations.
Learn from history
By reviewing the Smoot-Hawley Tariff Act, we have a general understanding of the content of the Smoot-Hawley Tariff Act, the background of the passage of the bill and its impact.Taking history as a mirror, what can we learn from history?
First of all, we need to understand, what is the difference between now and history?
1. Looking back at the history of the House and Senate
, although the Smoot-Hawley Tariff Act did not receive support from the business community, economists, and the media, the bill was still passed. Just like the current media, entrepreneurs, and trading partners do not support Trump’s tariff increase. A key prerequisite for passage of the Smoot-Hawley Tariff Act was a Republican majority in the House and Senate. So what is the current situation? Republicans currently lead 241-194 in the House of Representatives and 51-47 in the Senate. The Republicans in both houses of Congress are in the lead, but this only shows that the Republicans are in the lead, and not necessarily every Republican supports trade protectionism
. Moreover, Trump’s trade war this time was not initiated through legislation, but through Act 301. Rights
2. The moral high ground
The right people will help
Not all tariff increases are trade wars. If the tax rate increase is understood by both parties. At the same time, trade is not a matter between China and the United States. The trade behavior and tariff behavior of both parties are in the eyes of other trading partners. Therefore, justice is particularly important at this time. There was no WTO in 1930. The United States raised tariffs based on its own interests. The legitimacy at that time was difficult to evaluate. At present, trading partners all operate under the WTO framework, so compliance with WTO trade rules and fulfillment of commitments have become the highest moral high ground.
3. China and the United States
Unlike the indiscriminate taxation in 1930, this trade dispute mainly focuses on China and the United States. What is also different from that year is that there was overcapacity in agricultural products in the United States.
4. Substitutability
For China, chip imports are higher than oil imports. In particular, the ZTE incident also shows the dominance and irreplaceability of the United States in the high-tech field. On the other hand, China is highly replaceable. In other words, assuming that both sides increase equal tariffs on all products, China has no choice but to import higher-priced technology products. Instead, China's exports to the United States will be replaced by third countries.
Enlightenment of the Tariff Bill
1. Free trade is not a matter of course. Once upon a time, high tariffs were a matter of course. China's development has a great relationship with the WTO and the global free trade system. Therefore, it is particularly important to maintain, abide by, and fulfill rules and commitments;
2. Protective tariffs are a disaster for international trade. The 1930 tariffs were intended to focus on one area of agricultural products, but they spiraled out of control and turned into comprehensive protectionist tariffs. Now, the United States initially only imposed punitive tariffs on steel and aluminum, but now it is moving towards comprehensive tariffs;
3. Due to the existence of nuclear balance, a trade war is unlikely to cause a large-scale war. But what about small-scale unrest? Or will high unemployment return? There is no way to predict;
4. The meaning and impact behind the tariffs on June 15, 2018 may go far beyond the scope of the trade war. It reflects the awakening of a big country. To the United States, China is no longer a cute panda. It is foreseeable that in the future, there will be more changes and challenges in the Internet, technology patents, free navigation in the South China Sea, and the military.
