Paul Cobaugh: Tariffs Launched the Great Depression

Paul Cobaugh retired from the military after a 19-year career. He served in Special Operations and received multiple awards for his service. He focused on mitigating adversarial influence and advancing US objectives by way of influence. Throughout his career he has focused on the centrality of influence in modern conflict whether it be from extremist organisations or state actors employing influence against the US and our Allies. He writes at “Truth About Threats,” where this post appeared. He writes here about the dangers of ignoring history. To read the complete post, open the link.

Cobaugh writes:

As we get ready to transition into 2025 and a new Trump administration, let’s take a good look at the sheer, staggering idiocy of his campaign pledge to start a global tariff war. We’ve been here before and it was called the Smoot-Hawley Tariff Act. It was a primary factor that led us into a Great Depression, a World War and the most disruptive period in modern US and world history. 

For those that pay attention, history is often painfully instructive if left unheeded. It wasn’t just Tariffs in the US of the 1930s that laid devastating economic pain onto the backs of America’s working classes. Unregulated and poorly regulated greed contributed their fair share as well. The 1930s all together have some pronounced parallels to the America we now live in. Tariff wars are but one of those parallels. All combined, those same parallels represent acute threats to not only working-class Americans but to our republic itself. 

During the Roaring Twenties, post WW I, America was prosperous, hopeful and on the rise. The Stock Market crash of 1929 and the 1930 Smoot-Hawley Tariff Act brought all of this to an end, not only for the US but the globe. The Great Depression ushered in the 1940s , which saw the globe fully immersed in WW II and the beginning of the Cold War. Twenty years of intense global upheaval literally shook the world. Nothing would ever be the same again. If you consider the Great Depression as a precursor to WW II, then Smoot-Hawley was a primary cause of the Great Depression. Let that sink in. 

The political landscape of the 1930s, was as diverse and active as at any time in our history. The Great Depression spawned a very large number of progressive movements and even a fairly strong socialist movement, both in pursuit of protecting the workers who had suffered badly from a lack of employment. 

Today, diverse and contrary political movements include many as fascist as those of Nazi Germany, Italy and Japan, or as forward-leaning in support of American workers as today’s progressives. Unlike the 1930s, today’s political landscape does not include the record high 900,000 enrolled in Socialist movements that we saw up until 1932. By the late 1930s, the socialists were mostly gone but the American far-right movements lasted up until the day that America declared war on Germany, post Pearl Harbor. Today, the fascists still exist in the form of MAGA and related movements, while that socialism is still mostly absent from any significance on the American political landscape. Those on today’s political spectrum that work to protect workers almost always come from the political left, progressive or otherwise.

Today though, is about tariffs and how they are always mentioned as one of those most prominent causes of the Great Depression. 

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Smoot-Hawley was a bill designed in theory to protect American agriculture from foreign competitors. In the end, it hurt both deeply. This protectionist measure also played out against a backdrop of a deep American commitment to isolationism, as the rest of the world slowly but unstoppably marched towards a world war. 

The Hawley- Smoot Tariff and 
the Great Depression, 1928– 1932

In the 1920s, the focus of trade policy shifted from protecting manufacturing to protecting agriculture. Congress struggled to fi nd the right 
way to assist farmers and relieve farm distress, turning to a tariff revision 
after President Coolidge vetoed price- support legislation. The resulting 
Hawley- Smoot tariff of 1930 proved to be the most controversial piece of 
trade legislation since the Tariff of Abominations in 1828. The subject of 
heated debate during its difficult passage through Congress, the legislation 
helped push the average tariff on dutiable imports to near- record levels just 
as the economy was sliding into the Great Depression. The early 1930s 
saw an unprecedented contraction of world trade, during which time many 
other countries retaliated against the United States and significantly increased their own trade barriers. The Hawley- Smoot tariff had far- reaching 
consequences and it marked the last time that Congress ever set duties in 
the entire tariff schedule.

- Clashing over Commerce: A History of U.S. Trade Policy
- This PDF is a selection from a published volume from the National Bureau
of Economic Research
- Volume Author/Editor: Douglas A. Irwin
- November 2017

The bottom line to Smoot-Hawley and presumably President-elect Trump’s threats against our neighbors and most other nations, is that tariffs start tariff wars, in which there are no winners. Also, it is working Americans that do the overwhelming majority of the suffering. At the moment, toxic oligarchy is keeping the prices of goods and services artificially inflated. No, not inflation, but just plain and simple, old-fashioned price-gouging. 

There is legitimate fear of Trump’s approach to the economy. First of all, he’s inheriting President Biden’s hot, well-grounded economy, just like he did in 2016 from the Obama administration. He has already told us that he doesn’t think it will be easy to lower consumer prices and as we all have learned during his 2018 losing trade war with China, it is the American people who pay the cost of tariffs. 

Introduction to the research from the National Bureau of Economic Research

“The ghost of Smoot-Hawley seems to haunt President Trump.”1 As fears of a trade war between the U.S. and China grew after the U.S. presidential election of 2016, many commentators drew precisely this link between the events of 1930 and today. And the consensus was that the trade wars of the 1930s were an ominous portent of what might await the world if Donald Trump’s protectionist impulses were not checked

The conclusion of the research from the National Bureau of Economic Research

President Trump’s recent use of tariffs as a “weapon” to cudgel other nations into changing their trade policies has renewed interest in understanding what trade wars are and how they affect flows of goods and services across borders. As our research indicates, the current trade war was by no means the first one initiated by the U.S. The passage of Smoot-Hawley led to direct retaliation by important U.S. trade partners. Countries responded to its passage by imposing tariffs 24 targeting U.S. exports. Although protectionism was on the rise in the 1930s, we collect novel data and design empirical tests which show that retaliation against Smoot-Hawley was distinctive: it involved policies specifically directed at the U.S., the initial provocateur. 

Using a new data set on quarterly bilateral trade flows as well as detailed information on who filed official protests during the legislative debate over the Tariff Act of 1930 and who (later) retaliated, gravity model estimates demonstrate that U.S. exports were severely affected by the Smoot-Hawley trade war. Even after controlling for financial crises, the effects of the global decline in aggregate demand, and the overall decline in partner countries’ imports from all sources, U.S. exports fell substantially. If they had just fallen in line with the overall reduction in imports in each country, we would have found no effect: instead, they fell disproportionately, by between 15 and 33 percent, depending on the specification and the countries involved. By examining the effects for protestors as well as retaliators, we are able to more extensively assess the retaliation against Smoot-Hawley: this was not limited to those countries traditionally regarded as “retaliators”. 

Product-level regression estimates confirm that retaliators were strategic in their response to Smoot-Hawley (as they have been in more recent trade wars), choosing to bludgeon key U.S. exports differentially. Fast-growing U.S. exports of automobiles appear to have been particularly targeted by U.S. trade partners. Our results suggest that MFN constraints did not prevent countries from effectively retaliating. In addition to strategically targeted tariffs, retaliation involved such non-tariff measures as quotas, boycotts and increased sales resistance to American goods. Our results show that this retaliation was extremely effective in reducing U.S. exports. In March 2018, Peter Navarro famously predicted that no country would retaliate against U.S. tariffs. 29 The evidence from the 1930s suggests it is a mistake, even for a country as wealthy and powerful as the United States, to assume that it can engage in a trade war with impunity.

- THE SMOOT-HAWLEY TRADE WAR- NATIONAL BUREAU OF ECONOMIC RESEARCH
- Kris James Mitchener
- Kirsten Wandschneider
- Kevin Hjortshøj O'Rourke
- March 2021

To wrap up this short history lesson, I wish to remind readers that trade wars rarely achieve their desired effect and more often than not… backfire. Tariffs are always paid by the consumer, not the companies involved in the import/ export of products. Projections for Trump’s intended tariffs suggest an increase of at least $1,900 a year for the average family although depending on the products and services used, it could easily be five times that. In an economy where consumers are already being abused at the cash register, such additions to family budgets are not only unwelcome, but could negatively impact other important budget items. 

Most families do not have room in their budgets to fight trade wars that make the oligarchical elite, wealthier, while their budget becomes overburdened because of tariffs. This is why tariffs are often described as a “tax” on consumers.