by Mitch Kokai
Senior Political Analyst, John Locke Foundation
The ghosts of Reed Smoot and Willis Hawley are haunting the presidency of Donald J. Trump, even before it begins. To avoid the risk of recession, an exorcism of sorts is urgently required. Sen. Smoot and Rep. Hawley co-sponsored America’s infamous Smoot-Hawley Tariff Act of 1930, which hiked tariffs on imports to record levels. A global trade war resulted, as other countries responded in kind. U.S. foreign trade plunged by 40%, which helped drag the economy into the Great Depression. More than 1,000 economists sent a petition to then-President Herbert Hoover urging him, without success, to veto the act, correctly arguing that it would “injure the great majority of our citizens.”
In homage to those 1,000 economists, Barron’s petitions incoming President Trump to appreciate the case for free trade in the hope of averting a similar injury to the nation’s great majority. In fact, Trump should take steps to make U.S. trade policy freer than it is now, after a noticeable backslide over the past 15 years. Distressing echoes of Hawley and Smoot were heard from candidate Trump, both during his campaign and since his election. Even before putting his feet up on the desk of the Oval Office, he has killed the Trans-Pacific Partnership (“a terrible deal”), which had been agreed to by 12 Pacific Rim countries, and he has condemned the 22-year-old North American Free Trade Agreement with Canada, the U.S., and Mexico, on the shaky argument that it’s costing American jobs.
In even more Smoot-like fashion, Trump has urged draconian across-the-board tariffs of 35% and 45%, respectively, on imports from Mexico and China, America’s largest sources of imports in dollar terms. Such tariffs, says Cato Institute trade expert Dan Ikenson, “would be devastating to the U.S. and global economies and would destroy the international trading system.” The result would be a global recession and a bear market in stocks.
If President-elect Trump wants to tweak America’s 14 trade agreements to make them more favorable to U.S. exporters, there can be no great objection, though he might be surprised to find that negotiators on the other side of the table have legitimate grounds for pushing in the opposite direction.
As Ikenson points out, any aggressive move by the White House to hike tariffs will get pushback from a Republican-dominated Congress that has traditionally supported trade liberalization. Even greater pushback would come from business interests whose global supply chains depend on keeping trade barriers in check. Unlike the days of Smoot-Hawley, when imports were mainly end-products sold to consumers, half of all U.S. imports today are intermediate products sold to businesses, says Ikenson. The cheap imports help make it profitable for these businesses to operate—and to provide jobs to American workers.