Joe Gentry

In 1776, commenting on tariffs and other restrictions on international trade in his “Wealth of Nations,” Adam Smith wrote:

“What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage … In every country, it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest, that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question, had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind. Their interest is, in this respect, directly opposite to that of the great body of the people.”

Those words are as true today as they were in 1776. It is often said that bad economic policy reflects disagreement among economic experts; and if all economists gave the same advice, economic policy would be good. Economists often do disagree, but that has not been true with respect to international trade. Ever since Adam Smith, there has been virtual unanimity among economists, whatever their ideological positions on other issues, that international free trade is in the best interest of the trading countries and of the world. Eighteenth century philosopher David Hume — also a pioneer of economics — stated in his “Treatise of Human Nature” that the truths of reason are true by definition but that the truths of the world we live in are based on experience, not abstract logic. In order to establish economic truths, we need to look at actual cases of economics in action. Let’s look at what happened in 1930 when Congress passed the Hawley-Smoot Tariff Act to observe the political and economic consequences of protectionism.

The old saying, that if all economists were laid end to end they would never reach a conclusion was disproved when 1,038 American economists — including virtually every reputable economist in the country of whatever political view — signed a petition urging President Hoover to veto the bill. The economists warned if enacted this tariff act would “inevitably provoke other countries to pay us back in kind” that would damage the United States and other countries. Hoover passed the bill disregarding this advice. The Republican platform in 1928 favored high tariffs as a formula for economic prosperity promising to protect the present agriculture depression by raising tariff rates on farm products. Labor admitted that higher prices would result, but hoped that the bill would revive rising unemployment by stimulating the output of domestic goods replacing imports.

The economists proved right in their foreign retaliation warning. France, Italy, Spain, and others introduced import quotas and raised tariffs, and Switzerland boycotted American products. Canada raised tariff walls to the highest point in history. The United States was worse off than it had been before the tariff act passed. United States exports to Great Britain fell to one-third of their 1929 level by 1932, and fell to one-fourth their 1929 level to Canada and France. Agriculture was hit the hardest — the very industry President Hoover expected to help. Wheat exports which totaled $200 million 10 years earlier fell to $5 million in 1932. Exports of automobiles fell from $541 million in 1929 to $76 million in 1932.

Looking back, the Hawley-Smoot Tariff Act was worse than futile. It did not solve unemployment and it did not solve other problems of American labor, industry or agriculture; instead, it worsened them by helping shatter world trade. It contributed to the growth of nationalism in many countries and deepened the political and economic crisis of the 1930s. This tariff act helped bring on the Second World War in Europe and Asia.

Our current multifaceted and complicated international trade agenda certainly is not worthy of Adam Smith’s principle of free trade. American leadership in post-World War II has put heavy stress on continuous progress toward a liberal world trading system. However, in our modern era trade includes restrictive policies with heavy emphasis on nontariff barriers including quotas and import restrictions. Is free-trade a fair-weather system? Maybe. But protectionism is no solution; it is only an aggravant of a worldwide slump. The hard job of our political leaders is containing or appeasing the pressures of the special interests for protectionism against foreign imports without devastating liberal international trade and hurting “the great body of people.”

Famous economist Henry Hazlitt has stated, “that depth in economics brings men back to common sense. For depth in economics consists in looking for all the consequences of a policy instead of merely resting one’s gaze on those immediately visible. To see the problem as a whole, and not in fragments: that is the goal of economic science.”

Joe Gentry is a former adjunct economics instructor at Alpena Community College. Reach him at 989-354-2221 or jgentry@unitedwaynemi.org.