America is one of the most successful capitalist economies in the world. May it keep progressing in the future as well. However, the former President, Donald J. Trump wanted a 25% increase in trade tariffs. Well, this seems that he was unaware of what had happened the last time when the tariffs were increased.
You must be wondering, what had happened earlier that led the American economy into crises. They say, learn from your mistakes. However, Trump was about to make a decision that would have brought down the economy once again. With that being said, now this time; the results would be far worse and uncontrollable.
Without wasting much time, let’s see what was that fateful decision, and why it was wrong.
In June 1930, the US Senate passed the Smoot Hawley Act, which turned out to be the worst nightmare for the Americans.
How did the Smoot Hawley Tariff affect the American economy?
After World War II, countries were trying to rebuild themselves. It was then that the Smoot Hawley Act was passed by the US Senate. In June 1930, the Smoot Hawley Tariff Act triggered an increase in the taxes on foreign agricultural exports. The rates were already high, and the Act further raised the bar. It was meant to support the farmers, who were finding it difficult to manage their standard of living due to the Great Depression.
However, instead of turning out beneficial for the farmers, the Act triggered an increase in food prices and forced other countries to retaliate as well. This retaliation led to a decrease in global trade by 65%.
Not only did America suffer from the Smoot Hawley Act, but it affected the global economy as well.
Let’s have a look at how did Smoot Hawley Tariff Act affect the American economy in particular.
Effects of Smoot Hawley Act on the American Economy
The day the House passed the act, America started moving towards the historic economic crises, which we today refer to as the Great Depression.
The very first downturn was a drop of 191 points in the stock market in 1929 when the House accepted the bill. However, the Republicans then revised the bill on June 19, 1929, and the stock market gained 216 points.
Later in October, when the new presidential candidate, Herbert Hoover supported the bill, the foreign investors started withdrawing their funds from the U.S.
The worst was yet to come. On June 17, 1930, Hoover signed the bill into law. And boom! The stock market crashed to 140 points.
The American Economy after June 1930
As the American stock market crashed, millions of Americans lost their investments, and they were back to square one. Not only this, but the imports became more unaffordable.
Seeing this, other countries like Canada and European countries also increased tariffs on US exports. This led to a decrease in the trade from $7 billion to a mere $2.5 billion.
The bill was initially meant to help farmers, but instead, the agricultural exports fell to a third of the accumulative trade.
Moreover, as the global trade plummeted, the American manufacturers were forced to halt their businesses. This situation led to the domino effect and resulted in what we now call the Great Depression.
All in all, we should learn the lesson, the Smoot Hawley Tariff Act has taught us, as to how the trade protection practice can turn an economy upside down.