The Smoot-Hawley Trade War Flashcards

Overview of the Smoot-Hawley Trade War Study and Findings

• The study, conducted by Kris James Mitchener, Kevin Hjortsh%j O’Rourke, and Kirsten Wandschneider, documents the outbreak of a trade war following the United States' adoption of the Smoot-Hawley tariff in June 1930.

• Key findings include a significant decline in U.S. exports to retaliating partners, falling by approximately $28\%$ to $32\%$.

• The research utilizes a new quarterly dataset of bilateral trade for $99$ countries and a second product-level dataset for U.S. exports to $59$ countries between 1926 and 1932.

• Retaliators targeted the most important U.S. exports, such as automobiles, which fell by an additional $33\%$ in those markets after the tariff was enacted.

• Welfare gains from trade for retaliating nations fell by roughly $8\%$ to $16\%$.

• The study refutes the traditional view that protectionism had a negligible impact compared to the GDP collapse during the Great Depression by focusing on geographical trade distortions and specific retaliation.

Historical Context and Origins of the Smoot-Hawley Tariff

• Post-WWI Agricultural Distress: The roots of the tariff began with the First World War. New World producers expanded production while European farming was depressed. When European production returned, crop prices fell, leading to a U.S. recession in 1920–1 and prolonged agricultural depression in the 1920s.

• Political Pressures: The Fordney-McCumber tariff of 1922 increased industrial protection. Midwestern Republicans and Democrats sought a "level playing field" for farmers. Herbert Hoover endorsed higher agricultural tariffs during the 1928 Presidential election.

• Legislative Process:   - Hearings began in January 1929 under Willis Hawley (House Ways and Means Committee).   - The resulting bill raised industrial tariffs more than agricultural ones.   - The Senate Finance Committee, chaired by Reed Smoot, shifted the bill toward agriculture.   - The final Hawley-Smoot bill was signed by Hoover on June 17, 1930, effective the next day.

• Tariff Increase: The legislation raised the average U.S. tariff on dutiable imports by approximately $6$ percentage points.

Defining and Categorizing International Responses

• Trade War Definition: Following Conybeare (1987), a trade war is a category of intense international conflict where states interact, bargain, and retaliate primarily over economic objectives related to traded goods sectors using restrictions on the flow of goods.

• Types of Foreign Responses:   - Direct Retaliation: Measures taken specifically against the United States (the focus of this study).   - Signal for Protectionism: Viewing the U.S. move as a breakdown of international discipline and raising barriers against all countries.   - No Response/Domestic Protectionism: Doing nothing or raising tariffs solely for domestic reasons unrelated to the U.S. action.

• Responders Categories:   - Protesters: Countries that filed official petitions with the U.S. State Department (35 countries/colonies by Fall 1929).   - Retaliators: Countries documented by contemporary sources (Mann, 1930; Jones, 1934) as imposing tariffs specifically in response to Smoot-Hawley.   - Threateners: Countries that protested but did not formally retaliate.

Detailed Breakdown of Foreign Reprisals and Retaliation

• Canada: Characterized as aggressively responding. It lowered duties on $270$ British Empire goods and imposed countervailing duties on $16$ American products (approx. one-third of U.S. exports to Canada). It later passed an "emergency tariff" on textiles, meat, and electrical equipment.

• France: Raised tariffs on automobiles and parts in April 1930. The basis changed from value to weight, effectively increasing rates by almost $50\%$ for some models. The tariff for American lard was doubled.

• Italy: Duties on automobiles were raised by between $100\%$ and $167\%$. The Royal Italian Auto Club called for a boycott of American cars.

• Spain: The "Wais tariff" (July 1930) targeted automobiles, tires, and motion picture equipment. Duties for a car weighing $800\,kg$ were $1,440$ pesetas if European-made vs. $2,400$ pesetas if U.S.-made.

• Switzerland: Responded with boycotts of typewriters and automobiles. The tariff on typewriters rose from $\$5.25$ to $\$21.89$ per $100\,pounds$.

• Other Retaliators: Argentina, Australia, Mexico, New Zealand, and Cuba are also classified as retaliators.

Analysis of Protester and Retaliator Characteristics

• The study uses a probit model to predict which countries responded:   $Responder_i = \alpha_0 + \beta_1 US Export Share_{i,1928} + \beta_2 Trade Balance_{i,1926-8} + \beta_3 Trade Balance vs US_{i,1926-8} + \beta_4 MFN Agreement_i + \beta_5 Polity Score_i + \beta_6 Indebtedness Dummy_i + \beta_7 Continent Dummy + \epsilon_i$

• Polity and Democracy: More democratic countries (higher polity scores) were significantly more likely to protest; a one-unit increase in the polity score raised the probability by around $14\%$.

• Econometric Findings:   - A country’s bilateral trade balance with the U.S. was not a statistically significant predictor of response.   - Countries running larger overall trade surpluses were more likely to respond.   - Political factors like World War I debt and existing Most-Favored-Nation (MFN) agreements did not play a significant role.

Quantitative Effects on Bilateral Trade Flows

• The Gravity Model: The researchers estimated the impact on imports ($IM_{ijt}$) using importer-time ($d_{jt}$), exporter-time ($d_{it}$), and pairwise ($d_{ij}$) fixed effects:   $\ln(IM_{ijt}) = \alpha + \gamma_1 Responder_{ijt} + \eta Controls_{ijt} + d_{it} + d_{jt} + d_{ij} + \epsilon_{ijt}$

• Results for U.S. Exports:   - Responders: U.S. exports were on average $25\%$ lower (OLS) or $18\%$ lower (PPML).   - Retaliators: Exports fell by between $28\%$ and $32\%$.   - Threateners: Imports from the U.S. fell by between $15\%$ and $23\%$, suggesting "de facto" retaliation beyond official labels.

• Robustness:   - For sovereign (non-colonial) nations, responders reduced U.S. imports by $41\%$ to $47\%$.   - Imperial preference countries (Canada/Australia) showed the strongest retaliatory effects, followed by Latin American countries and Spain.

Strategic Product Targeting and Automobile Case Study

• Strategic Methodology: Testing if countries targeted "Top 10" U.S. export goods to circumvent MFN obligations.   $\ln(EX_{kjt}) = \alpha + \delta_1 Top10_{kj} \times Responder_{jt} + d_{kt} + d_{jt} + d_{kj} + \epsilon_{kjt}$

• Findings on Targeting:   - Chief U.S. exports to retaliators fell by an additional $33\%$.   - Chief exports to threateners fell by an additional $19\%$.

• The Automobile Sector: Automobiles were a visible, differentiated consumer good. The study found a negative and statistically significant effect for the triple-interaction term (Top10 $\times$ Retaliator $\times$ Automobiles).

• Automobile Impact: Retaliators reduced automobile imports from the U.S. by an additional $43\%$.

Welfare Impacts of the Trade War

• Welfare Formula: The study modifies the Arkolakis et al. (2012) and Felbermayr et al. (2015) formulas:   $G_j = 1 - \mu_j - (1 + \delta \eta / \epsilon_\tau ) \lambda_{jj}^{1/ \epsilon_\tau }$   - $\epsilon_\tau$: Elasticity of imports (set to $8.0$).   - $\lambda_{jj}$: Domestic expenditure share.   - $\mu_j$: Tariff multiplier (share of aggregate tariff revenue in income).   - $\delta \eta$: Parameter for model type (Armington/Krugman vs. Melitz).

• Calculations for 1929–1931:   - For Retaliators: Welfare declined by roughly $0.3$ percentage points between 1929 and 1930, and $0.5$ percentage points by 1931.   - This equates to a loss of approximately $8\%$ to $16\%$ of the total welfare gains from trade.   - For the United States: The welfare impact through 1931 was small and inconsistent in sign (approx. $-14.3\%$ change in welfare gains by 1931).

Appendix: Specific Retaliation Data

• Argentina: Boycott and stiffened regulations on U.S. apples; average tariff rose from $16.7\%$ to $28.7\%$ by 1933.

• Australia: Increased duties on gasoline ($6\,cents/gallon$), tobacco ($12\,cents/pound$), and a $20\%$ increase on Oregon logs/timber.

• Canada (May 1, 1930): Introduced "countervailing duties" where Canadian rates automatically rose to match any higher rate imposed by the country of origin. Potatoes moved from free to a duty of $75\,cents\,per\,hundredweight$.

• Italy (June 30, 1930): Duty on cheapest Ford model increased from $\$350$ to $\$815.50$.

• Switzerland (Dec 10, 1930): Typewriter tariff rose from $\$5.25$ to $\$21.89$ per $100\,pounds$.

• Spain (July 22, 1930): Increased duties on sewing machines, razor blades, and hams; specifically penalized "extra European" cars.