1. Why did the United States pass the Smoot-Hawley Act in 1930?
2. What interest groups would be interested in passing similar legislation today?
3. Other than tariff duties, what other trade restrictions could nations impose on the products of other nations?

This textbook emphasizes that free and open trade between nations is healthy for the economies of most nations. Reviewing historical events will not necessarily indicate a cause-and-effect relationship, but insight can be gained by studying trade legislation of the past.

Various scholars have analyzed the reasons for the stock market crash of 1929—especially in the wake of the most recent recession. Actually, that crash did not occur in a single day at the New York Stock Exchange. The so-called crash took nearly three years, stretching from the bull market high of September 3, 1929, to July 8, 1932, the date the Dow Jones Industrial Average hit a record low of 41.22. Many individuals suggest that the impending passage of the Smoot-Hawley Tariff Act led to the crash.

The Smoot-Hawley Act was designed to give American firms an advantage over foreign companies. There were several reasons why a tariff bill would have such a negative effect on people involved in the stock market. Many people felt the bill was bad for American business firms. It would raise tariff barriers that would make it more difficult for foreign firms to sell their wares in the United States. Opponents of the measure realized that if high tariffs made selling in the United States more difficult for foreign firms, then foreign sales would drop. The end result would be that foreign firms would be less able to buy needed goods from American firms.

Secondly, in international trade, it has become an almost automatic reflex for a country whose firms are hurt by high tariffs to retaliate by increasing its own tariffs. The passage of the Smoot-Hawley Act resulted in high tariffs on an international scale. International trade became very difficult, and the United States had almost no meaningful trade with other nations.

Because of the current unfavorable balance of trade with Japan and China, many legislators and union officials have suggested tougher trade legislation is needed for the United States. Legislators point out that Japanese products flood this country while American firms have barely gotten a toe inside the door of the Japanese market. Although Americans have made in-roads into the Chinese market, the United States has more of a trade deficit with China than any other country.

Another problem occurs when nations subsidize industries or market groups. For example, several European nations have subsidies for agricultural or farm products and place restrictions on United States farm product exports. Japan also provides subsidies or protected markets for its agricultural products. Naturally, United States farm interests feel these are unfair trade restrictions.

Legislation is frequently suggested to counter perceived unfair trade restrictions. But opponents of restrictive legislation for the United States point out the results of the Smoot-Hawley Act and suggest a similar trade bill would damage the nation’s economic health just as the 1930 act did. Many advocates of “freer” trade believe the best way to deal with restrictive trade policies of other countries is to negotiate for freer markets.