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Smoot-Hawley’s Misguided Folly

Charlottetown Guardian - February 13, 2017
Victoria Times-Colonist - February 16, 2017
Nationalnewswatch - February 17, 2017 

By Colin Kenny

In June 1930, the Congress of the United States passed the “Smoot-Hawley Tariff Act”, named for its Republican sponsors, Utah Senator Reed Smoot and Oregon Representative Willis Hawley.
The original piece of legislation was designed to protect American agriculture but within days, other industries began storming Washington demanding similar protections.

The thinking was that tariffs would protect American industry, save jobs and allow producers to raise the price of their goods.

The effect was almost exactly the opposite. As the US raised protective tariffs, other nations followed suit and international trade stagnated.

Between 1929 and 1932, U.S. exports to Europe fell by 66.5 per cent while imports fell 71 per cent. In the end, world trade had declined by approximately 66 per cent by 1933. The fallout from Smoot-Hawley’s misguided folly spread as the Great Depression mushroomed. It was a “beggar thy neighbour” policy and it backfired.

Millions of Americans eventually lost everything after having been sucked in by their government’s predictions of prosperity – much in the same way as they are being sucked in today. That includes their evident support for President Donald Trump’s push to renegotiate the 1994 North American Free Trade Agreement, which he calls fundamentally “unfair” to the U.S.

But what does “fair” mean? Only if Americans benefit? It’s perfectly normal for a President to put American interests first. Prime Minister Trudeau was elected to do the same. But for any deal to ever get done, both sides have to think it’s a good deal for them – and that includes NAFTA.

The latest report from the Office of the U.S. Trade Representative included concerns about our supply management of dairy and poultry products, provincial alcohol marketing monopolies, taxes on liquor imports, aerospace subsidization, and telecom ownership restrictions. Surprisingly, we don’t issue similar reports on our trading partners. God knows why not.

But in re-opening NAFTA, President Trump runs the risk of falling into the same kind of black hole created by Smoot-Hawley 87 years ago.

Then there’s the “law of unintended consequences.” It’s sure to kick in again if President Trump doesn’t alter his approach. If the US introduces protective tariffs, other nations are guaranteed to do the same. When this happens, Americans will be forced to pay significantly more for a broad range of goods and services that were previously imported on the cheap.

The fallout north of the border will inevitably mean a reduced market for American exports. And a struggling Canadian economy will surely mean less Canadians indulging in a southern holiday next winter. I wonder how that would play with the Florida Chamber of Commerce, where President Trump has considerable business and personal interests.

Embracing a ‘lobbyist approach’ is the key to obtaining any sort of success in Washington. Because even if it turns out that Trudeau and Trump become the closest of friends, that won’t do much for us at the bargaining table. A chorus of angry US voters in Florida worried about a sagging tourism industry will have a greater effect on US representatives than anything that could come from our negotiators.  

What counts in Congress is how American voters feel, not how friendly foreign allies feel. We can help ourselves most by persuading the 35 states that have Canada as their top export market, to tell Mr. Trump that a tariff war with Canada will hurt jobs in their home communities.

Canada does have some big cards to play if needed. We supply 16% of electricity New York and New England need and 97% of total US natural gas imports. These two Canadian exports are a reliable source of energy and are crucial for an American market looking to diversify away from OPEC.

It looks like it is time for us to remind Mr. Trump of George Santayana’s comment that “those who do not learn history are doomed to repeat it.”

[Colin Kenny is a former member of the Senate Standing Committee on Banking, Trade, and Commerce and also served as Chair of Internal Economy in the 90s]