A news story from boston.com informs us that the Obama Administration has imposed tariffs on tires imported from China. This is interesting particularly since the US is mired in a recession with no sense as to when we will begin to grow again. It appears that the administration does not have any understanding on what affect tariffs have on economic growth.
Let's review what happened in 1930. President Herbert Hoover signed the Smoot-Hawley Tariff Act and it became law about a year after the stock market crashed in 1929. The rationale at that time was that if prices of foreign goods were high (this act imposed tariffs on foreign goods at levels never seen before, making foreign goods unaffordable to most citizens) Americans would buy American-made goods. This single act caused a trade-war and helped put the American and world economy in a depression.
Those that were in support of this act did not understand the dynamics of trade. Trade is a two-way street. Since America had imposed tariffs on foreign goods, foreign countries reciprocated. They refused to import American goods. This had a particular impact on the American farmer. No longer were foreign markets open to US farm products. Prices of farm products dropped dramatically and many farms went out of business. Many banks in rural areas that provided loans to farmers collapsed.
Will this tariff cause a depression in America today? Not if it is an isolated incident. Smoot-Hawley was on a wide range of products and affected many industries. If tariffs become more wide-spread and are imposed on more goods from foreign countries, then you will see a greater impact on the US ecomony and thus impeding our ability to grow again. And, this recession will be far deeper and longer than it otherwise would have been.
The details of the boston.com story can be found here.
