American protectionism in the 20th century
While the United States has never sought autarky policies, or self-reliance policies to avoid dependency on any other states, throughout its history has turned to protectionist methods especially in times of crisis. These tools include: tariff of duty imposed on certain types of imported goods, non-tariff trade barriers such as limiting by quotas, and subsidies for domestic industries, which allows prices to be lowered without losing money. The intention of the act was to protect recovering American companies during the difficult economic time by increasing the price of foreign goods that competed with local products. However, raising tariffs on imports in turn raises the cost of production, which leads to increases in unemployment and higher prices for consumers. Scholars have argued that the Smoot-Hawley Act had such a lasting detrimental impact on the Great Depression that without it could have remained a recession.
The government realized its error and by 1934, the U.S. passed the Reciprocal Trade Agreements Act, which countered the protectionist aspects of Smoot-Hawley, central planning elements of Roosevelt’s “New Deal” policies and reignited the shift towards liberalizing trade. However, due to the extent that Smoot-Hawley eliminated international trade, it took 4 years to come out of the depression and several more to restore the relationships and foster steady positive growth in the economy. Though, the U.S. finally received the push it needed to crawl out of the depression with the immense increase in demand for the means of war after entering WWII. The immediate need workers for the manufacturing of weaponry, tanks, and fighter planes, etc. filled the void created by the depression. With the exponential growth in these areas the U.S. economy was able to stabilize and grow.
Many of the allied countries had an increasing need to import from the U.S. during and after the war, as their countries’ lay in ruin. The United States did not have to rebuild after the war, so the economy benefitted even more from exporting the raw materials need for European reconstruction. By the end of WWII, the United States also crafted the General Agreement on Tariffs and Trade (GATT), which after 1994 developed into the World Trade Organization (WTO). The introduction of GATT initiated a renewed era of free trade. Members agreed on a set of standardized tariffs and schedules to gradually reduce the tariffs bringing the cost of trade eventually to zero. The United States continues to be an advocate of freer trade, which has been apparent in its recent attempts to stabilize the economy in crisis.
Learning from the past has always been difficult for governments to accomplish, especially in the United States. Often looking back its clear to see a pattern of the same mistakes. More often, though, governments exhibit more of a corkscrew pattern; where mistakes are repeated with progress made in between and in theory each time a mistake is repeated the repercussions are less sever. Ben Bernanke is hoping by urging the U.S. not revert to protectionist behavior, as exhibited in legislation like the Smoot-Hawley Tariff of 1930, will lessen the severity of the current financial crisis. The United States has thus far heeded the warning, and has continued to gradually remove barriers to international trade even after the crisis began. For many commodities today the tariffs have been reduced to zero. Even in the several recessions between the Great Depression and today, the U.S. has sought alternative solutions instead of limiting trade.
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July 2010, Revised February 2011 JEL No. F10,F14,F42,G01,G20,G28