Personal Finance

How Smoot-Hawley Tariff sparked the ‘mother of all trade wars’

Published

2 months ago

February 5, 2025

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)

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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.”

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.

Inventories present a bigger risk than tariffs if consumer spending moderates, says Jefferies' Konik

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.

Personal Finance

Student loan repayment tips amid challenging times for borrowers

Published

3 seconds ago

April 6, 2025

Business Finance News

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It’s a challenging time for many federal student loan borrowers just trying to find ways to pay off their debt.

Millions of borrowers who enrolled in the Biden administration-era Saving on a Valuable Education plan are now in limbo after the program was blocked by Republican-led legal challenges.

Meanwhile, the Trump administration has changed the terms on several other repayment plans.

To successfully keep up with your student loan payments and eventually emerge debt-free, borrowers should explore their options and understand the terms of their repayment plan. Here’s what you need to know amid major challenges to the lending system.

How the SAVE plan got blocked

A U.S. appeals court in February blocked the Biden administration’s student loan relief plan known as SAVE.

The 8th U.S. Circuit Court of Appeals sided with the seven Republican-led states that filed a lawsuit against the U.S. Department of Education’s plan. The states had argued that former President Joe Biden, with SAVE, was essentially trying to find a roundabout way to forgive student debt after the Supreme Court struck down his sweeping debt cancellation plan in June 2023.

SAVE came with two key provisions that the lawsuits targeted: It had lower monthly payments than any other federal student loan repayment plan, and it led to quicker debt erasure for those with small balances.

Forbearance has no clear end date

When its SAVE plan got tied up in legal challenges, the Biden administration put millions of borrowers who’d enrolled in the plan in an interest-free forbearance. Borrowers, if they wish, can still remain in that payment pause.

There’s no specific end date to that forbearance as of now, said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for federal student loan servicers.

But unlike the Covid-era pause on student loan bills, this forbearance does not give borrowers credit toward debt forgiveness under an income-driven repayment plan or Public Service Loan Forgiveness.

Historically, at least, IDR plans limit borrowers’ monthly payments to a share of their discretionary income and cancel any remaining debt after a certain period, typically 20 years or 25 years. PSLF, which President George W. Bush signed into law in 2007, allows certain not-for-profit and government employees to have their federal student loans wiped away after 10 years of payments.

Borrowers have other options

Some borrowers who are in the SAVE program’s forbearance might want to sit tight, said higher education expert Mark Kantrowitz. Not having to make payments might be a relief to those who are experiencing any financial struggles.

Another benefit of remaining in the payment pause is that interest isn’t accumulating on your debt, like it would under other IDR plans, Buchanan explained.

“But months in SAVE forbearance do not count toward loan forgiveness, so both those considerations need to be weighed when thinking about switching plans,” Buchanan said.

If you do decide to switch out of the now-blocked SAVE plan, the Trump administration says that the other IDR plans now open are: Income-Based Repayment, Pay As You Earn and Income-Contingent Repayment.

The Education Department recently reopened those IDR plan applications, following a period during which the plans were unavailable. (The Trump administration said it was updating the plans’ applications to make them comply with the recent court order over SAVE.)

Borrowers should know that the automatic loan forgiveness after 20 or 25 years is not available at the moment under ICR or PAYE “since the courts have questioned that permissibility under statute,” Buchanan said.

Still, if a borrower enrolled in ICR or PAYE, then switches to IBR, their previous payments made under the other plans will count toward loan forgiveness under IBR, as long as they meet the plan’s other requirements, Buchanan said.

Meanwhile, borrowers in any of the three IDR plans can get credit toward PSLF.

If you’re on strong financial footing and not seeking loan forgiveness, the Standard Repayment Plan is a smart option for borrowers, experts say. Under that plan, the payments will usually be larger than on an IDR plan, but they’re fixed and borrowers are typically debt-free after just a decade.

Personal Finance

Here’s why ‘dead’ investors outperform the living

Published

23 hours ago

April 5, 2025

Business Finance News

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“Dead” investors often beat the living — at least, when it comes to investment returns.

A “dead” investor refers to an inactive trader who adopts a “buy and hold” investment strategy. This often leads to better returns than active trading, which generally incurs higher costs and taxes and stems from impulsive, emotional decision-making, experts said.

Doing nothing, it turns out, generally yields better results for the average investor than taking a more active role in one’s portfolio, according to investment experts.

The “biggest threat” to investor returns is human behavior, not government policy or company actions, said Brad Klontz, a certified financial planner and financial psychologist.

“It’s them selling [investments] when they’re in a panic state, and conversely, buying when they’re all excited,” said Klontz, the managing principal of YMW Advisors in Boulder, Colorado, and a member of CNBC’s Advisor Council.

“We are our own worst enemy, and it’s why dead investors outperform the living,” he said.

Why returns fall short

Dead investors continue to “own” their stocks through ups and downs.

Historically, stocks have always recovered after a downturn — and have gone on to reach new heights every single time, Klontz said.

Data shows how detrimental bad habits can be relative to the buy-and-hold investor.

The average stock investor’s return lagged the S&P 500 stock index by 5.5 percentage points in 2023, according to DALBAR, which conducts an annual investor behavior study. (The average investor earned about 21% while the S&P 500 returned 26%, DALBAR said.)

The theme plays out over longer time horizons, too.

The average U.S. mutual fund and exchange-traded fund investor earned 6.3% per year during the decade from 2014 to 2023, according to Morningstar. However, the average fund had a 7.3% total return over that period, it found.

That gap is “significant,” wrote Jeffrey Ptak, managing director for Morningstar Research Services.

It means investors lost out on about 15% of the returns their funds generated over 10 years, he wrote. That gap is consistent with returns from earlier periods, he said.

“If you buy high and sell low, your return will lag the buy-and-hold return,” Ptak wrote. “That’s why your return fell short.”

Wired to run with the herd

Emotional impulses to sell during downturns or buy into certain categories when they’re peaking (think meme stocks, crypto or gold) make sense when considering human evolution, experts said.

“We’re wired to actually run with the herd,” Klontz said. “Our approach to investing is actually psychologically the absolute wrong way to invest, but we’re wired to do it that way.”

Market moves can also trigger a fight-or-flight response, said Barry Ritholtz, the chairman and chief investment officer of Ritholtz Wealth Management.

“We evolved to survive and adapt on the savanna, and our intuition … wants us to make an immediate emotional response,” Ritholtz said. “That immediate response never has a good outcome in the financial markets.”

These behavioral mistakes can add up to major losses, experts say.

Consider a $10,000 investment in the S&P 500 from 2005 through 2024.

A buy-and-hold investor would have had almost $72,000 at the end of those 20 years, for a 10.4% average annual return, according to J.P. Morgan Asset Management. Meanwhile, missing the 10 best days in the market during that period would have more than halved the total, to $33,000, it found. So, by missing the best 20 days, an investor would have just $20,000.

Buy-and-hold doesn’t mean ‘do nothing’

Of course, investors shouldn’t actually do nothing.

Financial advisors often recommend basic steps like reviewing one’s asset allocation (ensuring it aligns with investment horizon and goals) and periodically rebalancing to maintain that mix of stocks and bonds.

There are funds that can automate these tasks for investors, like balanced funds and target-date funds.

These “all-in-one” funds are widely diversified and take care of “mundane” tasks like rebalancing, Ptak wrote. They require less transacting on investors’ part — and limiting transactions is a general key to success, he said.

“Less is more,” Ptak wrote.

(Experts do offer some caution: Be careful about holding such funds in non-retirement accounts for tax reasons.)

Routine also helps, according to Ptak. That means automating saving and investing to the extent possible, he wrote. Contributing to a 401(k) plan is a good example, he said, since workers make contributions each payroll period without thinking about it.

Personal Finance

As recession risk jumps, top financial pros share their best advice

Published

2 days ago

April 4, 2025

Business Finance News

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There is at least a 60% chance of recession if Trump's tariffs stick, says JPMorgan's David Kelly

Meanwhile, J.P. Morgan raised its odds for a U.S. and global recession to 60%, by year end, up from 40% previously.

“Disruptive U.S. policies has been recognized as the biggest risk to the global outlook all year,” J.P. Morgan strategists said in a research note on Thursday.

Allianz’s Chief Economic Advisor Mohamed El-Erian also warned on Friday that the risk of a U.S. recession “has become uncomfortably high.”

‘There is some nervous energy’

“There is some nervous energy there,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York, of the conversations he is having with his clients.

Even though stocks took a beating on Friday, “we advise them to focus on fundamentals and what they can control, which means maintaining a strong cash reserve and discipline around cash flow so that they can stay in the market and feel confident about taking advantage of buying opportunities,” said Boneparth, a member of the CNBC Financial Advisor Council.

Recession or not, maintaining a consistent cash flow and investment strategy is key, other experts say.

“The best way to manage these moments is to maximize your current and future selves is to block out noise that doesn’t apply to your plan,” said CFP Preston Cherry, founder and president of Concurrent Financial Planning in Green Bay, Wisconsin.

Letting emotions get in the way is one of “the greatest threats to life and money plans,” said Cherry, who is also a member of the CNBC Advisor Council.

When it comes to volatility tolerance, sharp drops in the market are to be expected, the advisors say.

“The stock market is unpredictable, but historically, there’s a trend in how the market recovers,” Cherry said.

“In years with market corrections and pullbacks, these are the worst days, which are followed by the best days,” he added.

In fact, the 10 best trading days by percentage gain for the S&P 500 over the past three decades all occurred during recessions, often in close proximity to the worst days, according to a Wells Fargo analysis published last year.

“Being out of the market and missing the best days and cycles after recessions significantly hurt portfolios in the long run,” Cherry said.

Boneparth said his clients also “know volatility and uncertainty is part of the game and, most importantly, know not to sell into chaos.”

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