Personal Finance
How Smoot-Hawley Tariff sparked the ‘mother of all trade wars’
QINGDAO, CHINA – NOVEMBER 8, 2023 – Container ships frequently enter and exit the Qianwan Container Terminal of Qingdao Port in Qingdao, Shandong Province, China, Nov 8, 2023. (Photo by Costfoto/NurPhoto via Getty Images)
Nurphoto | Nurphoto | Getty Images
A trade war is brewing — and, if history is any guide, the U.S. economy may not be too happy about it.
President Donald Trump levied a 10% tariff on all imports from China starting Tuesday. In response, China retaliated with its own tariffs of up to 15% on select U.S. imports, starting Feb. 10.
Experts believe these are just the initial salvos of a broader trade war between the two nations.
Meanwhile, the U.S. is on the precipice of a trade spat with Canada and Mexico. Trump has also threatened to impose tariffs on the European Union — and, if that happens, the nations have vowed retribution.
“I will never support the idea of fighting allies,” Danish Prime Minister Mette Frederiksen said Monday. “But of course, if the U.S. puts tough terms on Europe, we need a collective and robust response.”
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The current animosity bears many similarities to an earlier episode in U.S. history — the Tariff Act of 1930 — which triggered an all-out trade war and exacerbated the Great Depression, according to economic historians.
The law, known as the Smoot-Hawley Tariff, was “one of the most controversial tariff acts ever enacted by Congress,” Doug Irwin, an economics professor at Dartmouth College and past president of the Economic History Association, wrote in 2020.
It was also the last instance of a trade war involving the U.S., prior to Trump’s first term, said Kris James Mitchener, an economics professor at Santa Clara University who studies economic history and political economy.
Smoot-Hawley sparked “the mother of all trade wars,” Mitchener said.
What was the Smoot-Hawley Tariff?
Hawley (left) and Reed Smoot in April 1929, shortly before the Smoot–Hawley Tariff Act passed the House
Source: Library of Congress
If the Smoot-Hawley Tariff sounds vaguely familiar, it may be thanks to pop culture: The 1986 movie “Ferris Bueller’s Day Off” has a memorable scene in which a high school teacher drones on in a crawling monotone voice about the tariffs.
Among Smoot-Hawley’s chief aims was to safeguard U.S. farmers, who had expanded agricultural production during WWI but suffered after the war as European production came back online and prices collapsed, Mitchener said.
However, Congress expanded the scope of the tariffs considerably, extending beyond agriculture to include all sectors of the economy. The law got its name from its chief Republican supporters in Congress: Rep. Willis Hawley of Oregon, chair of the tax-writing House Ways and Means Committee, and Sen. Reed Smoot of Utah, who chaired the Senate Finance Committee.
Smoot-Hawley was “broad,” putting tariffs on roughly 25% of all goods imported to the U.S. — about 800 to 900 different types of goods, Mitchener said.
If the U.S. puts tough terms on Europe, we need a collective and robust response.
Mette Frederiksen
prime minister of Denmark
Herbert Hoover, who had run for president on a platform to help farmers with protective tariffs, signed the law in June 1930, ignoring a petition signed by more than 1,000 economists asking him to veto the bill.
The law raised dutiable tariffs — tariffs on goods subject to import duties — by about six percentage points, on average, Mitchener said.
While that may not sound like much, those duties sparked a trade war with major U.S. trading partners, which was perhaps their “most important ramification,” wrote Irwin of Dartmouth College.
How did Smoot-Hawley provoke a trade war?
Smoot-Hawley raised the average tariff on dutiable imports to 47% from 40%, Irwin said. Depression-era price deflation ultimately helped push that average to almost 60% in 1932, he added.
Nine nations — Argentina, Australia, Canada, Cuba, France, Italy, Mexico, Spain and Switzerland — imposed retaliatory tariffs directed specifically at U.S. products, Mitchener said.
“Canada, which was heavily dependent on the U.S. market, retaliated almost immediately and imposed tariffs significant enough to put a sizable dent into American exports,” Irwin wrote.
That “tit-for-tat response” with targeted tariffs is the hallmark of a trade war, Mitchener said.
Other nations formed trade blocs that excluded the U.S., Irwin wrote. Ultimately, 35 governments lodged official protests against Smoot-Hawley, Mitchener said.
The result: Global trade collapsed, exacerbating the Great Depression, which was the worst economic downturn in U.S. history, economists said. U.S. exports to retaliating nations fell by about 28% to 32%, said Mitchener. Further, nations that protested Smoot-Hawley also reduced their U.S. imports by 15% to 23%.
It was “among the most catastrophic acts in congressional history,” according to a historical overview on the U.S. Senate website.
Tariffs leading up to President Trump
The U.S. reversed course after realizing how tariffs can fuel foreign policy issues and contribute to world wars, said Scott Lincicome, vice president of general economics at the Stiefel Trade Policy Center of the CATO Institute.
The global economy is “like an intricate choreographed dance,” Lincicome said. “Tariffs are just kind of throwing a wrench in that dance.”
The average tariff rate for dutiable imports cratered from about 59% in 1932 to roughly 13% in 1950, and fell below 5% from the mid-1990s to 2015, according to a 2024 analysis by the CATO Institute.
Meanwhile, the average tariff rate across all imports — which include products not subject to tariffs — fell from about 20% in 1933 to below 2% from 2000 to 2019.
While presidents who preceded Trump, as well as President Joe Biden, have also used tariffs, they were enacted for different reasons and at different magnitudes, experts say.
These have not been rationales used for tariffs in the past.
Brett House
professor of professional practice in the economics division at Columbia Business School
Historically, “tariffs have been typically invoked by U.S. administrations when domestic industry has complained about competition from foreign suppliers,” said Brett House, professor of professional practice in the economics division at Columbia Business School.
For instance, during President Barack Obama’s second administration in 2013, the International Trade Commission issued “anti-dumping duties,” or a form of tariff, on washing machines specifically from Mexico and South Korea.
Years later, during his first term, Trump issued a tariff on washing machines as well, but it was global instead of narrowing it to specific countries. At the same time, Trump imposed other tariffs such as costs on steel and aluminum.
Other presidents, including George W. Bush, Ronald Reagan and Richard Nixon, had also put tariffs on steel, an industry that’s historically received federal protection, Irwin told CNBC. But Trump’s second term is unique in that he’s using tariffs in a “broad brush” manner — applied to all a nation’s goods, for example — something “no president in recent memory” has done, Irwin said.
Additionally, “what is very distinct about Trump’s tariff policy is the supposed justification for it, which is to try to discipline Canada and Mexico for the flow of illegal drugs and undocumented people across their borders,” House said.
“These have not been rationales used for tariffs in the past.”
Will history repeat?
The Smoot-Hawley-induced spat resembles today’s trade environment in a few key ways — including prominent trade partners calling for retaliation against U.S. policy, economists said.
For example, before reaching 11th-hour deals to delay 25% tariffs for one month, officials in Canada and Mexico vowed to fight back.
Canadian President Justin Trudeau on Saturday warned that his country would implement a 25% tariff on about $107 billion of U.S. goods. They included duties on meat, dairy, produce and other food products, and beer, wine and spirits.
China said it will impose 15% tariffs on coal and liquefied natural gas imports from the U.S., and 10% on American crude oil, agricultural machinery and certain cars.
“We’re already seeing a trade war unfold,” Irwin told CNBC.
Proposed tariffs on Canada, China and Mexico would shrink U.S. economic output by 0.4 percentage points and increase taxes on Americans by $1.1 trillion between 2025 and 2034, before accounting for any retaliation, according to an estimate by the Tax Foundation.
Of course, “whether it becomes a trade war and history repeats in that [Smoot-Hawley] dimension depends on the response of our trade partners and/or whether Trump is bluffing to get some sort of concession,” Mitchener wrote in an e-mail.
The Federal Reserve held interest rates steady at the conclusion of its policy meeting on Wednesday.
In what could be Jerome Powell’s last as chair before President Donald Trump’s yet-to-be-confirmed nominee Kevin Warsh takes the helm, central bankers maintained the federal funds rate in a target range of 3.5% to 3.75%.
Inflation has surged since the war with Iran began, leaving policymakers with limited room to act, according to Sean Snaith, the director of the University of Central Florida’s Institute for Economic Forecasting. “We’re in a kind of suspended animation — between Iran and the Fed transition,” Snaith said.
Before the oil shock, inflation was holding above the Fed’s 2% target but not worsening. Now the jump in energy costs could have longer-term inflationary effects, economists say.
For Americans struggling in the face of higher gas prices and overall affordability challenges, the central bank’s decision to keep interest rates unchanged does little to ease budgetary pressures. “The cavalry isn’t coming anytime soon,” Snaith said.
How the Fed decision impacts you
The Fed’s benchmark sets what banks charge each other for overnight lending, but also has a trickle-down effect on many consumer borrowing and savings rates.
Short-term rates are more closely pegged to the prime rate, which is typically 3 percentage points above the federal funds rate. Longer-term rates, such as home loans, are more influenced by inflation and other economic factors.
Credit cards
Most credit cards have a short-term rate, so they track the Fed’s benchmark.
After the Fed cut rates three times in the second half of 2025, the average annual percentage rate has stayed just under 20%, according to Bankrate.
“Without Fed rate cuts, there’s not much reason to expect meaningful declines anytime soon, so carrying a balance will remain very expensive,” said Matt Schulz, chief credit analyst at LendingTree.
Mortgage rates
Fixed mortgage rates, on the other hand, don’t directly track the Fed but typically follow the lead of long-term Treasury rates.
Concerns about how the Iran war will impact the U.S. economy have already pushed the average rate for a 30-year, fixed-rate mortgage up to 6.38% as of Tuesday, from 5.99% at the end of February, according to Mortgage News Daily.
That leaves homeowners with existing low mortgage rates “feeling stuck,” said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion. “Mortgages, more than any other credit type, work on a churn,” she said, referring to how a dip in rates can boost borrowing activity.
Student loans
Federal student loan rates are also fixed and based in part on the 10-year Treasury note, so most borrowers are somewhat shielded from Fed moves and recent economic uncertainty.
Current interest rates on undergraduate federal student loans made through June 30 are 6.39%, according to the U.S. Department of Education. Interest rates for the upcoming school year will be based in part on the May auction of the 10-year note.
Car loans
Auto loan rates are tied to several factors, including the Fed’s benchmark. Because financing costs remain elevated, new car buyers are taking on longer loans to keep their monthly payments manageable, according to the latest data from Edmunds.
Even so, with the rate on a five-year new car loan near 7%, the average monthly payment on a new car rose to $773 in the first quarter of 2026, an all-time high.
“Car buyers are in a tough spot right now because they’re getting squeezed from both ends: high sticker prices and high interest rates, with neither showing any signs of letting up,” said Joseph Yoon, consumer insights analyst at Edmunds.
“Until the rate picture shifts, buyers will keep stretching loan terms to make payments work, which only adds to the total cost of ownership down the road,” Yoon said.
Savings rates
While the Fed has no direct influence on deposit rates, the yields tend to be correlated with changes in the target federal funds rate. So, although rates on certificates of deposit and high-yield savings accounts have fallen from recent highs, they are holding above the annual rate of inflation.
For now, top-yielding online savings accounts and one-year CD rates pay around 4%, according to Bankrate.
“Yields on high-yield savings accounts and certificates of deposit are down from their peaks of a few years ago, but they’re still strong compared to what we’ve seen for most of the past decade,” Schulz said.
Milan Markovic | E+ | Getty Images
The average tax refund is 11.2% higher this season, compared with about the same period in 2025, according to the latest IRS filing data.
As of April 10, the average refund amount for individual filers was $3,397, up from $3,055 about one year ago, the IRS reported on Friday.
The IRS data reflects about 114 million individual returns received, out of about 164 million expected through Tax Day. Next week’s filing update is expected to include data through the April 15 deadline.
President Donald Trump‘s 2025 legislation, rebranded to the “working families tax cuts,” was a key talking point for Republicans on Tax Day.
With the November midterm elections approaching and Republicans defending slim majorities in Congress, many GOP lawmakers have highlighted Trump’s tax breaks and higher average refunds.
Meanwhile, affordability has been top of mind for many Americans amid rising costs of gas, electricity, food and other living expenses.
For filers who expected a refund this season, nearly one-quarter, or 23%, planned to use the funds to pay down credit card debt, and the same share said they would save the payment, according to the CNBC and SurveyMonkey Quarterly Money Survey, released in April. It polled 3,494 U.S. adults at the end of March.
Who benefited from Trump’s ‘big beautiful bill’
“It’s been a great tax season for the American people,” many of whom have benefited from Trump’s tax breaks, Treasury Secretary Scott Bessent said during a White House press briefing on Wednesday.
More than 53 million filers claimed at least one of Trump’s “signature new tax cuts” — the deductions for tip income, overtime earnings, seniors and auto loan interest — the Department of the Treasury also announced on Wednesday.
Those filers, who claimed the deductions on Schedule 1-A, have seen an average tax cut of over $800, according to the Treasury. Tax cuts can trigger a higher refund or reduce taxes owed, depending on the filer’s situation.
Some filers who itemize tax breaks have also seen benefits from the bigger federal deduction limit for state and local taxes, known as SALT. Trump’s legislation raised that cap to $40,000, up from $10,000, for 2025.
The latest SALT deduction limit change is expected to primarily benefit higher earners, according to a May 2025 analysis of various proposals from the Tax Foundation.
The Treasury has not released data on how many filers have claimed the SALT deduction during the 2026 filing season.
Traders work at the New York Stock Exchange on April 16, 2026.
NYSE
U.S. stocks climbed to record highs on Thursday against a backdrop of war, an oil supply shock and economic forecasts warning of stunted growth amid a protracted conflict.
Many investors may be thinking: Why?
Largely, it’s because the stock market is a barometer of what investors think will happen in the future, rather than an assessment of the present day, according to economists and market analysts.
Investors are essentially shrugging off the Middle East conflict as a blip that will be resolved relatively quickly, they said.
“The stock market isn’t trying to price what’s happening today,” said Joe Seydl, a senior markets economist at J.P. Morgan Private Bank. “The stock market is always trying to price what the world is going to look like six to 12 months from now.”
Why stocks have been ‘resilient’
The S&P 500, a U.S. stock index, fell about 8% in the initial weeks of the Iran war, from the start of the conflict on Feb. 28 to a recent low on March 30.
But stocks have rebounded since then, erasing all losses since the beginning of the war. The S&P 500 closed at an all-time high on Thursday — about 11% higher than its nadir at the end of March. That followed a record close on Wednesday.
“The market has remained very resilient in the face of the war and has rallied strongly on the prospect that it will be resolved,” said Mark Zandi, chief economist at Moody’s.
A ship waits to pass through the Strait of Hormuz following the two-week temporary ceasefire between the US and Iran, which is conditional on the opening of the strait, in Oman on April 8, 2026.
Shady Alassar | Anadolu | Getty Images
And while investors cheered the possibility of a diplomatic off-ramp to the conflict, the temporary ceasefire has appeared tenuous, with the U.S. and Iran each accusing the other of breaking the agreement.
Nations haven’t been able to reach a peace deal ahead of the ceasefire’s end. Vice President JD Vance said U.S. officials left peace talks in Pakistan over the weekend after the Iranian delegation refused to agree to American demands not to develop a nuclear weapon.
The markets ‘have memory’
Ultimately, the stock market is signaling a collective belief that tensions will ratchet down, the war will end in the near term and oil flows through the Strait of Hormuz will normalize, economists said.
That’s largely because investors have been conditioned to believe that President Donald Trump will back off if the economic pain becomes too intense, economists said — the so-called “TACO” trade, shorthand for “Trump always chickens out.”
“Investors strongly believe — and have been conditioned to believe — he’s going to stand down, find a way to pivot, declare victory and move on,” Zandi said.
Trump has pushed back on the notion of backing down, framing his brinkmanship as a savvy negotiating tactic.
Economists pointed to a recent example of this dynamic: in April 2025 during so-called liberation day, when the Trump administration levied a host of tariffs on U.S. trading partners.
Within days — after the stock market had cratered more than 12% — Trump announced a 90-day pause on those tariffs. Stocks then saw one of their biggest daily rallies in history following Trump’s reversal.
Investors remember that Trump often de-escalates geopolitical shocks — which is why they’ve seized on positive headlines that hint at progress in peace talks, for example, Seydl said.
“The markets have memory,” Seydl said.
AI stocks and the ‘tech boom’
Traders celebrating at the New York Stock Exchange on April 15, 2026, as the S&P 500 closed above the 7,000 level for the first time.
NYSE
There are other factors underpinning market resilience during wartime, economists said.
One is the investors’ enthusiasm for artificial intelligence and technology stocks, which account for almost half of the S&P 500’s market capitalization, Zandi said.
“Those stocks run on their own dynamic independent of anything, including the war in Iran,” Zandi said. “I think we would have been down a lot more and it would have been harder for us to recover had it not been for the very, very optimistic perspectives on AI.”
We’re in the middle of a “tech boom” — and investors are likely to remain optimistic until they think the tech cycle has run its course, Seydl said.
More broadly, stock investors are essentially making a bet on the future earnings growth of a company — and the earnings backdrop has been “pretty solid,” Seydl said.
Consumer spending appears to be stable, for example, economists said. And companies are getting a boost to their after-tax earnings from the GOP’s so-called “big beautiful bill,” which, among other things, made it easier to write off investments upfront and therefore reduce their tax liability, Zandi said.
Going forward
Experts said there will be an economic hit from the Iran war, though.
“Despite the recent news of a temporary ceasefire, some damage is already done, and the downside risks remain elevated,” Pierre-Olivier Gourinchas, director of research at the International Monetary Fund, wrote Tuesday.
A protracted conflict risks deep and global economic pain, he wrote.
Even if the conflict is short-lived — as the broad market expects — stocks are unlikely to march much higher until it’s clear the U.S. is on the other side of the war and its economic fallout, Zandi said.
If investors are incorrect, and President Trump doesn’t back down or quickly extricate the U.S. from the war, the stock market may see a “full-blown correction” or worse, Zandi said. A stock market correction is a decline of at least 10% from recent highs.
“Everyone thinks they know what the script is,” Zandi said. “Now they just need to follow the script. If they don’t, the market will have some real problems.”
The uncertainty provides yet another example of why the average investor with a long time horizon should stick to their investment plan and ignore the noise, experts said.
“Trying to time the market is very difficult if not impossible for the average investor,” Seydl said. “It’s better to take a long-term perspective and ride out bouts of volatility.”
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