SEN. MCCAIN: ... But I'm a student of history (Ha Ha). Every time the United States has become protectionist and listened to the siren song that you're hearing partially on this stage tonight, we've paid a very heavy price. The Smoot-Hawley Tariff Acts in the 1930s were direct contributors to World War II. It sounds like a lot of fun to bash Chinese and others, but free trade has been the engine of our economy in the last half of this year, it will continue to be, and free trade should be the continuing principle that guides this nation's economy.
And in the last debate McCain said:
Well, you know, nailing down Sen. Obama's various tax proposals is like nailing Jell-O to the wall. There has been five or six of them and if you wait long enough, there will probably be another one. But he wants to raise taxes. My friends, the last president to raise taxes and restrict trade during tough economic times was Herbert Hoover.And McCain's friend, Senator Grassley Said in 2006:
"You know, when you talk about a 27 percent tariff if a country doesn't do something the way we want them to do it, then, you know, that's what we did with Smoot-Hawley in 1930, and that brought on the Great Depression," said Grassley, whose state was hit hard by those tariffs.Where to begin?
First, Smoot-Hawley did not bring on the depression. The stock market crashed in October 1929 and Smoot- Hawley wasn't even signed until June 1930.
Secondly, Smoot- Hawley did not bring on the depression because the amount of exports and foreign trade was relatively small in 1930s America. In 1929, the boom year, exports accounted for 5 percent of GNP or $5 billion. During the 30s exports ranged from 2.8 to 3.6 percent of GNP. In dollar amount from $1.6 to $3.3 billion. Note that in 1950 after we had started GATT and reduced Tariffs exports were still only 4.9 percent of GNP or $13.3 billion. In 1960 with Tariffs further reduced, Exports were $21 billion or 4 percent GNP. Our GNP in growth from 1929 to 1960 was not driven by exports since they actually decreased as a percentage of our GNP.
Thirdly, 65 percent of all imports (by dollar amount) were not subject to any duty tariff (or tax) under Smoot-Hawley. That's right -zero, nada, zip.
Fourthly,Under Smoot Hawley the average import (includes free and subject to duty) was taxed 18% in 1931. But that wasn't much different than 1929 average rate of 13.5 percent and actually lower than the Average Tariff Duty of 29% levied in 1901, or the 20% average rate in 1911. Note the rate was 15% in 1924.
Fifth, the claim that Smoot-Hawley directly contributed to WW II is insane. The tariff was actually higher in 1914 - so I guess the US tariff is responsible for WW I too! (Has Smoot-Hawley been blamed for the Holocaust? Probably) The fact is US imports were not that significant. We only imported $4 billion in 1929 and 65 percent was NOT subject a tariff. Twenty-five percent of our trade was with Canada. Total imports from Asia were only $600 million in 1929 and $300 million in 1932. Imports from Germany were $250 million in 1929 and $80 million in 1932 under Smoot-Hawley. The drop in imports from Germany comes to $160 million or approximately $3 per German per year.
Sixth, 1930s US exports declined in total dollars for reasons other than raised trade barriers in response to Smoot-Hawley, for instance:
- A general price deflation, which meant the export dollar amounts decreased even though quantity stayed the same.
- A fall in demand due to the world wide economic depression.
- The raising of Tariffs against US goods due to other countries internal politics.
The question of other countries internal politics is an important one. Germany was suffering massive unemployment (over 25 percent) and had no desire to import US manufactured goods. The UK decided to raise barriers on all non-UK goods and devalue the Sterling to jump start its economy. Meanwhile, Japan was building its own industry up and wanted to protect it against US competition. Later in the 1930s these countries started gearing up for WW II, and had no money to spend on US autos or cigarettes.
So, its unclear how much was due to retaliation for Smoot-Hawley. However, given that only 1/3 of $4 billion imported in 1929 was actually subject to any tariff duty, I doubt retaliation was a significant factor.
Added: McCain refers to the "Smoot-Hawley Acts". There was only one Smoot-hawley. In 1934 FDR started to reduce the Tariff rates by bi-lateral negotiations. So there were no "Smoot-Hawley Acts.