supplemental case 3-3

DOES TRADE PROTECTION PROTECT OR RISK YOUR

FUTURE?
No topic in this chapter generates more differing opinions than that of trade
protectionism. In fact in the presidential election of 1996, protectionism was a hotly debated
subject and NAFTA was again in the headlines. In the 1996 Presidential campaign Republican
candidate Pat Buchanan won several primaries by focusing on this issue. Stories in newspapers
and commentators on television began referring again to “Smoot-Hawley.” When trade protection
comes up, this question is inevitably asked: “What is Smoot-Hawley and why does this term
appear ever so often?” Some history may help clarify the issue.
The date: June 13, 1930 (Friday the 13th). The time: 2:13 p.m. The place: the U.S.
Senate. The Great Depression had started, and the air was full of talk about trade protection. Over
1,000 economists warned the government that protectionism was dangerous and petitioned it not
to pass the Smoot-Hawley Act. (Hawley was a professor of economics at Willamette University.
Smoot was a banker and wool manufacturer.) But, by a vote of 44 to 42, the bill passed. It was an
act conceived by Republican congressmen, passed by a Republican Congress, and signed into law
by conservative, Republican President Herbert Hoover.
The bill imposed duties of up to 60% on almost everything imported into the United
States. The concept was to protect the Western beet sugar farmer by raising the duty for sugar;
protect the Northwestern wheat farmer by raising the duty on wheat; and protect the Imperial
Valley cotton farmer by raising the duty on cotton from Egypt. The list went on: cattle and dairy
products, hides, shoes, velvet, silk, china, pocket knives, watch parts, and so on.
The result was world trade fell by one third, and a global trade war started. Exports
dropped from $4.8 billion to $1.7 billion from 1929 to 1932. Imports dropped from $5.4 billion to
$2.4 billion. Other countries were plunged into depression as world trade fell. In 1934, Congress
passed the Reciprocal Trade Agreement Act to reduce tariffs, but it was too little too late.
The issue of world trade regulation continued. From 1987 until 1993, the GATT
discussions often reached impasse points or stalemates. A collapse of the negotiations would have
actually pleased protectionists. Instead the GATT agreement was passed by 124 nations in 1994.
Still the growth of several key trading blocs such as NAFTA and the EU raised the fear that a
new wave of protectionism might surface. These trading blocs allow for free trade among nations
in the same trading bloc, but may lead to greater protectionist legislation and less free trade
between nations in competing trading blocs. Many wondered if Smoot-Hawley is lifting its head
again.i

discussion questions for supplemental case 3-3:

1. Why do you suppose some politicians are pushing for trade protection? What are the
economic conditions that would call for protectionism?
2. Is there a lesson to be learned from the early 1930s concerning restrictive legislation on
world trade? What forces could cause Congress to reverse itself on this issue?
3. What should the role of the U.S. government be with regard to world trade? How much
effort should be made to protect American workers from foreign competition? When
should such efforts take effect?
i
Sources: Louis S. Richman, “What’s Next After GATT’s Victory?” Fortune, January 10, 1994, pp. 66-71;
Tim Lang, “The New Protectionism: Global Trade Rules Protect Corporations,” The Nation, July 15, 1996,
p. 29; John McGinnis, “Restraining Leviathan: If Free Trade Is Federalism’s Heir, Protectionism Is the
Best Way to Ensure a Future for Big Government,” National Review, March 11, 1996, p.40.; Robert W.
Staiger, “Economic Theory and the Interpretation of GATT/WTO,” The American Economist, September
22, 2002; and Mohamed Ariff, “Pitfalls Aplenty on the Fast Track to Trade,” New Strait Times, April 11,
2006.