Smoot-Hawley Tariff
What is Smoot-Hawley Tariff?
The Smoot-Hawley Tariff was an American law of the early 1930s that raised import duties, provoked retaliation abroad and helped shrink world trade.
Passed in the early 1930s as the Great Depression was taking hold, the law raised American import duties on a long list of goods, and more than a thousand economists signed a public petition asking the president to veto it. Trading partners retaliated with duties of their own, so American exporters lost markets at the same moment American buyers faced higher prices. The value of world trade fell by roughly two thirds over the next few years, though most of that reflects collapsing incomes and falling prices rather than the tariffs alone. Economists do not blame Smoot-Hawley for causing the Depression, because trade was a small share of American output while bank failures and monetary contraction did far more damage. Its lasting importance is as the standard example of retaliation, and as the reason later trade policy was built on negotiated, binding agreements.
Smoot-Hawley Tariff: a worked example
Take a country that can buy a good on the world market for $10. At that price its buyers want 150 units and domestic firms supply 50, so imports are 100. A $4 tariff raises the domestic price to $14: domestic supply rises to 70, quantity demanded falls to 130, and imports drop to 60. The government collects $4 × 60 = $240, domestic producers gain, and consumers lose more than those two gains combined, with deadweight loss equal to two triangles of ½ × 20 × $4 = $40 each, so $80 in total. Now let the trading partner retaliate and the export industries lose sales too, which is how both countries end up worse off.
The mistake students make with smoot-hawley tariff
Many students learn that Smoot-Hawley caused the Great Depression and stop there. Get the order right: the downturn was already under way when the law passed, and higher duties then deepened it by cutting world trade further rather than by setting the collapse off. The other error is thinking a tariff hurts only foreigners. Domestic buyers pay the higher price, and once partners retaliate the country's own exporters lose their markets too.
Smoot-Hawley Tariff questions
What did the Smoot-Hawley Tariff do?
The Smoot-Hawley Tariff raised United States import duties on a very large number of goods in the early 1930s, pushing average tariff rates to among the highest in the country's history. It was meant to protect American farmers and manufacturers as the economy weakened. Instead it invited retaliation, so exporters lost foreign markets while consumers paid more at home.
Did the Smoot-Hawley Tariff cause the Great Depression?
No serious account treats the Smoot-Hawley Tariff as the cause of the Great Depression, because trade was too small a share of American output to produce a downturn of that size. Monetary contraction, bank failures and collapsing demand were the main forces. The tariff deepened the slump and broke down the world trading system, which made recovery harder everywhere.
Why do tariffs invite retaliation?
Tariffs invite retaliation because a tariff shifts income toward the country imposing it, and the exporting country can shift some of it back by taxing imports in return. Each government's best individual move is to protect its own producers, but when every government does it, all of them trade less and all lose, which is the structure of a prisoner's dilemma. That is why trade agreements bind countries to tariff limits they would not hold to on their own.
This is the live International Trade sandbox. Drag the curves, or open the full version.
Related terms
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated