Iceberg, right ahead

A Trumpian "transition period" for the economy is a risky leap in the dark

Photo by Ian Taylor on Unsplash

A senior banker said he “almost went down on my knees to beg” the president to stop the tariffs. One aide “fought like mad” to kill the protectionist duties.

More than 1,000 economists warned that boosting tariffs would “raise the cost of living and injure the great majority of our citizens.” They predicted harm to farmers, to investors and to job seekers in many industries. Moreover, “a tariff war does not furnish good soil for the growth of world peace,” wrote the economists.

Yet the backers of the tariff promised a “renewed era of prosperity.” The president listened to them, not the critics. He put the tariffs into effect.

This debate over tariffs wasn’t the one playing out today under President Donald Trump, but the one that preceded the signing of the infamous Hawley-Smoot tariff by President Herbert Hoover 95 years ago.

And while the world economy has changed dramatically in the past century, many economists predict that Trump’s chaotic march toward higher tariffs could bring about the same dire consequences as Hawley-Smoot. In effect, they are echoing the warning that lookout Frederick Fleet uttered when the Titanic was about to strike the ice on April 14, 1912: “Iceberg, right ahead.”

A disaster

Rep. Willis Hawley, left, and Sen. Reed Smoot.

There’s no question that the Hawley-Smoot tariffs were a disaster. After they went into effect, U.S. exports fell 49% and imports dropped 40%, wrote Douglas Irwin in Clashing Over Commerce: A History of US Trade Policy.

In 1930, the Canadian government reacted swiftly to the Hawley-Smoot tariff by lowering its trade barriers with the British empire and slapping duties on one third of US exports to Canada, including farm products and cast iron pipe, wrote Irwin. (Canada has taken retaliatory measures already against the Trump tariffs of 2025.)

In his 2017 book, Irwin cited the example of the trade in eggs, which is surely a topical subject right now due to the impact of the bird flu epidemic. (Interestingly, Canada has an ample supply of affordable eggs now.)

The Hawley-Smoot tariff raised the tariff on imported eggs from 8 cents to 10 cents a dozen. Canada responded by raising its duty on imported eggs from 3 cents to the 10-cent level the U.S. had imposed.

The result: Canada’s egg exports to the US dropped by 40%. But America’s exports of eggs fell by an astounding 98%. Clearly, American farmers got the raw end of that trade.

The effects

Canada was far from alone in retaliating against the U.S. tariffs; many nations raised trade barriers, and the global economy suffered greatly in the 1930s. The nations that retaliated against the US saw their imports from the U.S. fall by nearly a third, while some other nations saw lesser but still substantial drops, according to a 2021 study.

“U.S. exports were severely affected by the Smoot-Hawley trade war,” wrote Kris James Mitchener, Kirsten Wandschneider and Kevin Hjortshøj O'Rourke. “In March 2018, [Trump adviser] Peter Navarro famously predicted that no country would retaliate against U.S. tariffs. The evidence from the 1930s suggests it is a mistake, even for a country as wealthy and powerful as the United States, to assume that it can engage in a trade war with impunity.”

Paul H. Douglas, who would later serve as a U.S. senator from Illinois, began his career as an economist and helped draft the 1930 letter urging Hoover to veto the tariff.

As a teenager growing up in rural Maine, Douglas fought forest fires. Seeing how the slightest shift in the wind can fan a blaze — or a lucky downpour can quell it — Douglas developed a lifelong objection to the theory that history operates as a great pendulum: “that social events swing from right to left and back again with declining momentum until they come to rest at dead center.”

Instead, he wrote in his memoir, “I became aware of impetuous forces that, once set in motion, release latent forces until a cumulative process of change takes place.” The result: “the final, unpredictable result is out of all proportion to the initial cause.” That’s an apt description of the Hawley-Smoot tariff (and perhaps of Trump’s upending of the federal government).

As Douglas wrote:

No fewer than 1028 economists signed the appeal, and I think poor Hoover wanted to take our advice. His party was so strongly committed to protection, however, that he felt compelled to sign the bill, with the result that all our predictions came true. The Depression deepened and the Western democracies fell apart. Our letter did make it somewhat easier for Congress later to pass Cordell Hull's reciprocal- trade bill, and thus helped to lead the way to a reversal of our trade policy.

After the catastrophic damage caused by the Hawley-Smoot tariff, the U.S. pivoted to a freer trade stance, and Congress gave the president the power to set most tariff levels. Critics of free trade have blamed the policy for hollowing out the U.S. industrial base and for vastly increasing the scale of imports from China.

President Herbert Hoover, who signed the Hawley-Smoot tariff.

But the argument for free trade, made by economists from Adam Smith on, is compelling. Douglas wrote that “freedom of trade permits each nation to specialize in what it does best. The larger the total market, the more minute the subdivision of labor and the more economies of scale can be realized both inside and outside a plant. These result in greater total product for all…”

He added, “To those who urged tariffs as a means of ensuring national self-sufficiency in a war-dominated world, economists reply that freedom of trade, by making all countries interdependent, lessens the danger of war.”

Not a student

But Donald Trump is not a student of economics or history. He is wedded to using tariffs as a weapon.

As the New York Times reported, “For corporate America, including some major donors, the shock of Mr. Trump’s second term is that it turns out he really does believe the thing he’s been saying publicly for 40 years: Foreign countries are ripping America off, and tariffs are a silver bullet for America’s problems. When he says that ‘tariff’ is the most beautiful word in the dictionary, he means it.”

Trump should be learning the lessons of the Hawley-Smoot tariff. Instead, he’s paying them as little heed as students did to their teacher in a famous scene from Ferris Bueller’s Day Off.

Pity the poor economics teacher, played by Ben Stein.

The president has few fixed opinions, but clearly believes in a zero-sum world: If other nations are winning, the U.S. has to be losing.

Detox?

His fervent belief in tariffs has led experienced finance-world types like Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick to discard some long-held orthodoxies. They are bracing for stock declines and the possibility of economic hard times. The administration is planning to give other nations a number by April 2 representing the damage the U.S. believes it is suffering from unfair trade practices by those countries and serving as a basis for higher tariffs — or negotiated trade agreements, according to the New York Times.

Bessent says we’re in a time of transition and that stock market corrections are healthy. “The market and the economy have just become hooked,” Bessent said on March 7. “We’ve become addicted to this government spending, and there’s going to be a detox period.”

But he and Trump had best look at how hard it is to reverse economic and market downturns once they begin. What happens when the auto companies start reporting sales slumps because of tariff-induced higher prices? When earnings fall at Amazon and Walmart? And when the stock market penalizes companies for the poorer economic outlook?

Trasury Secretary Scott Bessent’s official photo.

A loooooong turnaround

The Hawley-Smoot tariff did not cause the Great Depression, which had already started. The tariff followed, rather than preceded, the catastrophic Wall Street crash of October, 1929.

But the tariff did nothing to bring about “renewed prosperity.” It didn’t boost the economy or stock prices. The Dow Jones average didn’t return to the heights it reached before the 1929 crash until 1954.

And it surely didn’t help the Republican Party, which took the blame in many voters’ minds for the Depression and the slow recovery. It lost the 1932 election in a landslide.

Franklin D. Roosevelt won 472 electoral votes, to Hoover’s 59. Democrats picked up nearly 100 seats in the House and 12 in the Senate. Both of the authors of the tariff — Rep. Willis Hawley of Oregon and Sen. Reed Smoot of Utah — lost their bids for reelection.

Republicans wouldn’t win another presidential election for 20 years.