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.
Rep. Jason Smith, R-Mo., speaks during a House Oversight and Accountability Committee impeachment inquiry hearing into U.S. President Joe Biden on Sept. 28, 2023.
Jonathan Ernst | Reuters
House Republicans have advanced trillions of tax breaks as part of President Donald Trump‘s economic package.
After debating the legislation overnight, the House Ways and Means Committee, which oversees tax, passed its portion of the legislation on Wednesday morning in a 26-19 party line vote.
But the battle over the deduction for state and local taxes, known as SALT, remains in limbo.
The text released Monday afternoon would raise the SALT cap to $30,000 for those with a modified adjusted gross income of $400,000 or less. But some House lawmakers still want to see a higher limit before the full House vote.
While the SALT deduction is a key priority for certain lawmakers in high-tax states, the current $10,000 cap was added to help fund the Tax Cuts and Jobs Act, or TCJA, of 2017.
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Following the vote, House Ways and Means Committee Chairman Jason Smith, R-Mo., said in a statement that Ways and Means Republicans will “continue to work closely with President Trump and our House colleagues to get the One, Big, Beautiful Bill that delivers on the President’s agenda to his desk as soon as possible.”
The full House vote could come as early as next week. But the legislation could see significant changes in the Senate, experts say.
House Republicans’ proposed tax cuts
The House Ways and Means Committee legislation includes several of Trump’s campaign priorities, including extensions of tax breaks enacted via the TCJA.
If enacted as drafted, Republicans could also deliver no tax on tips and tax-free overtime pay. But questions remain about the details of these provisions.
Rather than cutting taxes on Social Security, the plan includes an extra $4,000 deduction for older Americans, which may not fully cover Social Security income, according to some experts.
The $4,000 deduction costs $90 billion over 10 years, compared to $1 trillion for exempting Social Security income from tax, Garrett Watson, director of policy analysis at the Tax Foundation, wrote in a post on X Tuesday.
“Tax filers with no other income sources outside of Social Security would typically see little benefit, while others may see bigger gains from this idea,” he wrote in that thread.
The House Ways and Means bill also extends the maximum child tax credit of $2,000 enacted via the TCJA, and temporarily raises the tax break to $2,500 per child through 2028.
However, some policy experts have criticized the proposed credit design since lower earners typically can’t claim the full amount.
The proposed legislation “did nothing for the 17 million children that are left out of the current $2,000 credit,” Kris Cox, director of federal tax policy with the Center on Budget and Policy Priorities’ federal fiscal policy division, told CNBC.
Stephanie Phillips | Getty Images
“Markets go up and down, but students’ goals remain the same,” said Chris McGee, chair of the College Savings Foundation.
529 plan popularity has soared
In 2024, the number of 529 plan accounts increased to 17 million, up more than 3% percent from the year before, according to Investment Company Institute.
Total investments in 529s rose to $525 billion as of December, up 11% from a year earlier, while the average 529 plan account balance hit a record of $30,961, data from the College Savings Plans Network, a network of state-administered college savings programs, also showed.
“The industry is coming off its best year ever in terms of new inflows,” said Richard Polimeni, head of education savings at Merrill Lynch.
However, “in terms of the current market volatility, that creates some concern,” he added.
Even as concerns over college costs are driving more would-be college students to rethink their plans, college savings accounts are still as vital as ever.
Roughly 42% of students are pivoting to technical and career training or credentialing, or are opting to enroll in a local and less-expensive community college or in-state public school, according to a recent survey of 1,000 high schoolers by the College Savings Foundation. That’s up from 37% last year.
As a result of those shifting education choices, 69% of students are expecting to live at home during their studies, the highest percentage in three years.
Despite those adjustments, some recent changes have helped make 529 plans even more worthwhile: As of 2024, families can roll over unused 529 funds to the account beneficiary’s Roth individual retirement account, without triggering income taxes or penalties, so long as they meet certain requirements.
Restrictions have also loosened to allow 529 plan funds to be used for continuing education classes, apprenticeship programs and student loan payments. For grandparents, there is also a new “loophole,” which allows them to fund a grandchild’s college without impacting that student’s financial aid eligibility.
Managing 529 allocations in a volatile market
For parents worried about their account’s recent performance, Mary Morris, CEO of Commonwealth Savers, advises checking the asset allocation. “What you need to think about is assessing your risk appetite,” she said.
Generally, 529 plans offer age-based portfolios, which start off with more equity exposure early on in a child’s life and then become more conservative as college nears. By the time high school graduation is around the corner, families likely have very little invested in stocks and more in investments like bonds and cash. That can help blunt their losses.
Pay attention to your fund’s approach toward shifting from stocks to bonds, Morris said.
“If you are in a total stock portfolio, you may not want that ride,” she said: “You don’t want to get seasick.”
If the market volatility is still too much to bear, consider adjusting your allocation.
“One strategy is to start de-risking a portion of their portfolio and reallocate a portion into cash equivalent, which will provide a protection of principle while also proving a competitive return and peace of mind,” Polimeni said.
Still, financial experts strongly caution against shifting your entire 529 balance to cash. “The worst thing an investor can do in a down market is panic and sell investments prematurely and lock in losses,” Polimeni said.
Often that is the last resort. In the wake of the 2008 financial crisis, only 10% of investors liquidated their entire 529 accounts, and 20% switched to less risky assets, according to an earlier survey by higher education expert Mark Kantrowitz.
How to help 529 assets recover
For those who must make a hefty withdrawal for tuition payments now due, Polimeni suggests considering using income or savings outside the 529 to cover immediate college expenses, and requesting a reimbursement later.
You can get reimbursed from your 529 plan for any eligible out-of-pocket expenses within the same calendar year. “Using that strategy gives another six to seven months for the market to recover,” Polimeni said.
Another option is to tap a federal student loan and take a qualified distribution from the 529 plan to pay off the debt down the road. However, if you’re thinking of taking out private student loans or a personal loan that starts incurring interest immediately, you may want to spend 529 funds first in that case, and defer that borrowing until later.
Once you have a withdrawal plan, you can — and should — keep contributing to your 529, experts say. Not only can you get a tax deduction or credit for contributions, but earnings will grow on a tax-advantaged basis, whether over 18 years or just a few.
“The major advantage is the tax-deferred growth, so the longer you are invested, the more tax-deferred growth you will have,” Polimeni said.
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