Overview: The New Smoot-Hawley?

The Smoot-Hawley Tariff Act of 1930 was considered by many economists to be the single factor that transformed the U.S. recession into a global depression. The legislation was enacted on June 17, about 8 months after the collapse of the U.S. stock market. It quadrupled import tariffs on 20,000 goods, particularly agricultural products. Countries immediately retaliated, bringing international trade to a halt and depressing global demand. Ironically, the U.S. economy was showing signs of recovery by the spring of 1930. Unemployment stood at 7.8%, but the decline in global trade doubled the rate by 1931. The unemployment rate in the U.S. continued to climb, peaking at 25.1% in 1933. Although the decision to shelf the Free Trade Agreement (FTA) with Colombia should not be considered to be a return to U.S. protectionism, the growing restrictions against food exports could be the start of a dangerous trend.

The sharp increases in food prices are creating social problems throughout the globe. The consumption of basic foodstuff is on the decline among the poorer social classes, raising the risks of riots and protests. There were already incidents of violence in Africa and the Caribbean. With food prices rising more than 45% since the start of the year, poorer households are cutting their caloric intake. This is forcing many governments to take measures to hoard food stocks, such as increasing export tariffs and eliminating duties on agricultural imports. Egypt, Saudi Arabia, India, The Philippines and Vietnam already did so. Unfortunately, this is making matters worse. Trade restrictions lead to misallocations, hoarding and black market activity. Attempts at self-sufficiency will only lead to greater inefficiencies, shortages and higher prices. Global rice inventories, for example, are at a 25-year low. Some restaurants in The Philippines are going so far as to reduce the size of rice helpings in order to stretch supplies.Unfortunately, initiatives to limit global trade will create an adverse effect on the global economy-at its most vulnerable point in more than 75 years.

Although the new wave of trade protectionism is not raising import tariffs, the effects are largely the same. The reductions in import tariffs and the increases in export duties on agricultural goods will trigger a decline in global trade volumes. Countries are threatening to retaliate against each other as governments introduce more protectionist measures. Agriculture remains a major part of global trade, and a reduction in embarkations will surely undermine global demand. The rise of globalization during the 1990s realigned production along lines of comparative advantage. Many countries with large populations, such as China, opted for industrialization over farming. While some countries such as Brazil and Argentina deindustrialized in order to redirect more resources to their agricultural sectors. However, the introduction of biofuels and the growing prosperity across many emerging market countries sharply increased the demand for agricultural products at the same time when supply was being restricted due to climatic change and demographic shifts. The result was a spike in food prices. Unfortunately, politicians always fail to understand that liberalization is the key to more production and efficiency. The profit incentive will lead to more output, technological innovation and competition. However, the new wave of protectionism will only weaken the global economy instead of helping it. Hopefully, it does not have the same effects that Smooth-Hawley had almost 75 years ago.