Congressman Willis Hawley of Oregon and Senator Reed Smoot of Utah (Photo from the U.S. Library of Congress via the Wall Street Journal)
Until last week, the most famous example of the United States dramatically increasing tariffs on foreign imports was the Smoot-Hawley Tariff, which was passed by Congress and signed into law by President Herbet Hoover in June 1930. The website of the U.S. Senate describes the bill as “among the most catastrophic acts in congressional history.”
Did the Smoot-Hawley Tariff cause the Great Depression? According to the National Bureau of Economic Research’s business cycle dates, the Great Depression began in August 1929, well before the passage of Smoot-Hawley. By June 1930, industrial production had already declined in the United States by more than 17 percent. So, even if the downturn had ended at that point it would still have been severe. The contraction phase of the Depression continued until March 1933, by which time industrial production had declined more than 51 percent. That was the largest decline in U.S. history
If Smoot-Hawley didn’t cause the Depression, did it contribute to the Depression’s length and severity? Most economists believe that it did by contributing to the collapse of the global trading system, thereby reducing U.S. exports, aggregate demand, and production and employment.
Some years ago, Tony wrote an overview of Smoot-Hawley that discusses its causes and effects in more detail. A key question in assessing the effects of Smoot-Hawley is the extent to which key trading partners of the United States raised their tariffs in retaliation. The clearest case is Canada, which in 1930 was the leading trading partner of the United States. Canadian Prime Minister William Lyon Mackenzie King and the Liberal Party significantly raised tariffs on U.S. imports in explicit retaliation for Smoot-Hawley. This journal article that Tony co-wrote with two Lehigh colleagues discusses the empirical evidence for this conclusion. (The link takes you to the Jstor site. You may be able to read or download the whole article by clicking on the link on that page and entering the name of your college or university.)
The Trump Administration seems to be attempting a major reordering of the global trading system. A Canadian prime minister in the 1930s tried something similar. Richard Bedford Bennett became prime minister after his Conservative Party defeated Mackenzie King’s Liberal Party in the 1935 Canadian election. Bennett hoped to replace the U.S. market with the markets in England and other countries in the British Commonwealth. He argued that, taken together, the Commonwealth countries had sufficient resources to be largely self-sufficient and need not rely on trade with non-Commonwealth countries. In the end, Bennett was unsuccessful for reasons that Tony and a Lehigh colleague explore in this journal article.
Image generated by ChatGTP-4o of new cars on a dealer’s lot.
This afternoon (April 2), President Donald Trump announced a sweeping increase in tariff rates on imported goods. The increases were by far the largest since the Smoot-Hawley Tariff of 1930. The United States will impose 10 percent across-the-board tariff on all imports, with higher tariffs being imposed on individual countries. Taking into account earlier tariffs, Chinese imports will be subject to a 54 percent tariff. Imports from Vietnam will be subject to a 46 percent tariff, and imports from the countries in the European Union will be subject to a 20 percent tariff.
President Trump’s objectives in imposing the tariffs aren’t entirely clear because he and his advisers have emphasized different goals at different times. The most common objectives the president and his advisers have offered for the tariff increases are these three:
To increase the size of the U.S. manufacturing sector by raising the prices of imported manufactured goods.
To retaliate against barriers that other countries have raised against U.S. exports.
To raise revenue for the federal government.
The effects of the tariffs on the U.S. economy depend in part on whether foreign countries retaliate by raising their tariffs on imports from the United States and on whether, in the future, the president reduces tariffs in exchange for other countries reducing barriers to U.S. imports. For a background discussion of tariffs, see this post. Glenn and Tony discuss tariffs in this podcast, which was recorded on Friday afternoon (March 28). A discussion of the Smoot-Hawley Tariff can be found here.
The following Solved Problem looks at one aspect of the effects of a tariff increase.
Supports:Microeconomics and Economics, Chapter 6, Section 6.3.
Nearly every automobile assembled in the United States contains at least some imported parts. An article on axis.com made the following statement about the effect on U.S. automobile manufacturers of an increase in the tariff on imported auto parts: “If car prices [in the United States] go up, Americans will buy fewer of them, meaning less revenue ….” What assumption is the author of this article making about the demand for new automobiles in the United States?
Solving the Problem
Step 1: Review the chapter material. This problem is about the effect of price increases on a firm’s revenue, so you may want to review the section “The Relationship between Price Elasticity of Demand and Total Revenue.”
Step 2: Answer the question by explaining what must be true of the demand for new automobiles in the United States if an increase in automobile prices results in a decline in the revenue received by automobile producers. This section of Chapter 6 explains how the price elasticity of demand affects the revenue a firm receives following a price increase. A price increase, holding everything else constant that affects the demand for a good, always causes a decline in the quantity demanded. If demand is price inelastic, an increase in price will result in an increase in revenue because the percentage decline in quantity demanded will be smaller than the percentage increase in the price. If demand is price elastic, an increase in price will result in a decrease in revenue because the percentage decline in the quantity demanded will be larger than the percentage increase in price. We can conclude that the author of the article must be assuming that the demand for new automobiles in the United States is price elastic.
A tariff is a tax a government imposes on imports. Since the end of World War II, high-income countries have only occasionally used tariffs as an important policy tool. The following figure shows how the average U.S. tariff rate, expressed as a percentage of the value of total imports, has changed in the years since 1790. The ups and downs in tariff rates reflect in part political disa-greements in Congress. Generally speaking, through the early twentieth century, members of Congress who represented areas in the Midwest and Northeast that were home to many manufacturing firms favored high tariffs to protect those industries from foreign competition. Members of Congress from rural areas opposed tariffs, because farmers were primarily exporters who feared that foreign governments would respond to U.S. tariffs by imposing tariffs on U.S. agricultural exports. From the pre-Civil War period until after World War II the Republicans Party generally favored high tariffs and the Democratic Party generally favored low tariffs, reflecting the economic interests of the areas the parties represented in Congress. (Note: Because the tariffs that the Trump Administration will end up imposing are still in flux, the value for 2025 in the figure is only a rough estimate.)
By the end of World War II in 1945, government officials in the United States and Europe were looking for a way to reduce tariffs and revive international trade. To help achieve this goal, they set up the General Agreement on Tariffs and Trade (GATT) in 1948. Countries that joined the GATT agreed not to impose new tariffs or import quotas. In addition, a series of multilateral negotiations, called trade rounds, took place, in which countries agreed to reduce tariffs from the very high levels of the 1930s. The GATT primarily covered trade in goods. A new agreement to cover services and intellectual property, as well as goods, was eventually negotiated, and in January 1995, the GATT was replaced by the World Trade Organization (WTO). In 2025, 166 countries are members of the WTO.
As a result of U.S. participation in the GATT and WTO, the average U.S. tariff rate declined from nearly 20% in the early 1930s to 1.8% in 2018. The first Trump Administration increased tariffs beginning in 2018, raising the average tariff rate to 2.5%. (The Biden Administration continued most of the increases.) In 2025, the second Trump Administration’s substantial increases in tariffs raised the average tariff rate to the highest level since the 1940s.
Until the enactment in 1913 of the 16th Amendment to the U.S. Constitution, which allowed for a federal income tax, tariffs were an important source of revenue to the federal government. As the following figure shows, in the early years of the United States, more than 90% of federal government revenues came from the tariff. As tariff rates declined and federal income and payroll taxes increased, tariffs declined to only 2% of federal government revenue. It’s unclear yet how much tariff’s share of federal government revenue will rise as a result of the Trump Administration’s tariff increases.
The effect of tariff increases on the U.S. economy are complex and depend on the details of which tariffs are increased, by how much they are increased, and whether foreign governments raise their tariffs on U.S. exports in response to U.S. tariff increases. We can analyze some of the effects of tariffs using the basic aggregate demand and aggregate supply model that we discuss in Macroeconomics, Chapter 13 (Economics, Chapter 23). We need to keep in mind in the following discussion that small increases in tariffs rates—such as those enacted in 2018—will likely have only small effects on the economy given that net exports are only about 3% or U.S. GDP.
An increase in tariffs intended to protect domestic industries can cause the aggregate demand curve to shift to the right if consumers switch spending from imports to domestically produced goods, thereby increasing net exports. But this effect can be partially or wholly offset if trading partners retaliate by increasing tariffs on U.S. exports. When Congress passed the Smoot-Hawley Tariff in 1930, which raised tariff rates to historically high levels, retaliation by U.S. trading partners contributed to a sharp decline in U.S. exports during the early 1930s.
International trade can increase a country’s production and income by allowing a country to specialize in the goods and services in which it has a comparative advantage. Tariffs shift a country’s allocation of labor, capital, and other resources away from producing the goods and services it can produce most efficiently and toward producing goods and services that other countries can produce more efficiently. The result of this misallocation of resources is to reduce the productive capacity of the country, shifting the long-run aggregate supply curve (LRAS) to the left.
Tariffs raise the prices of U.S. imports. This effect can be partially offset because tariffs increase the demand for U.S. dollars relative to trading partners’ currencies, increasing the dollar exchange rate. Because a tariff effectively acts as a tax on imports, like other taxes its incidence—the division of the burden of the tax between sellers and buyers—depends partly on the price elasticity of demand and the price elasticity of supply, which vary across the goods and services on which tariffs are imposed. (We discuss the effects of demand and supply elasticity on the incidence of a tax in Microeconomics, Chapter 17, Section 17.3.)
About two-thirds of U.S. imports are raw materials, intermediate goods, or capital goods, all of which are used as inputs by U.S. firms. For example, many cars assembled in the United States contain imported parts. The popular Ford F-Series pickup trucks are assembled in the United States, but more than two-thirds of the parts are imported from other countries. That fact indicates that the automobile industry is one of many U.S. industries that depend on global supply chains that can be disrupted by tariffs. Because tariffs on imported raw materials, parts and other intermediate goods, and capital goods increase the production costs of U.S. firms, tariffs reduce the quantity of goods these firms will produce at any given price. In terms of the aggregate demand and aggregate supply model , a large unexpected increase in tariffs results in an aggregate supply shock to the economy, shifting the short-run aggregate supply curve (SRAS) to the left.
Our thanks to Fernando Quijano for preparing the two figures.
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