Reevaluating Tariffs: A Different View of Smoot-Hawley

In the contentious debate over tariffs, economists often cite the Smoot-Hawley Tariff Act of 1930 as a cautionary tale, warning of devastating economic consequences. However, Michael Pettis argues that this interpretation is misguided, and that the act's failures can be attributed to a unique economic context.

The US economy in the 1930s was characterized by an overproduction of goods, which was further exacerbated by global trade restrictions. In contrast, the US today is marked by a significant trade deficit, with citizens consuming more than they produce, potentially making tariffs a deflationary measure. By transferring income from net importers (households) to net exporters (producers), tariffs could increase GDP through job creation and higher wages that, in turn, boost total consumption.

However, Pettis notes that this can occur in two ways. Tariffs can either foster job creation and consumption or suppress consumption directly. The latter scenario, which he attributes to Smoot-Hawley, is often overlooked in popular discourse. Critics of tariffs claim they lead to inflation and reduced employment, but Pettis suggests the opposite: tariffs could help redirect demand towards domestic production, increasing employment and improving the economy.

Pettis proposes applying simple, transparent, and widely applied tariffs to redirect domestic demand towards domestic production and eliminate the US' role as the global consumer of last resort. While this would come with domestic risks, it could potentially improve the US economy. The effectiveness of tariffs, he emphasizes, depends on the specific circumstances and timing of their implementation.

The legacy of Smoot-Hawley is more nuanced than commonly assumed, with Pettis arguing that, in fact, tariffs can be a tool for better economic outcomes under certain conditions. The present economic context, with the US' swelling trade deficit, may offer an opportunity for tariffs to play a role in redirecting demand and improving the economy, provided they are carefully implemented.