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The Smoot-Hawley Fixation: Putting the Sino-US Trade War in Contemporary and Historical Perspective Simon J. Evenett1 University of St. Gallen, the St. Gallen Endowment for Prosperity Through Trade2 and CEPR 29 September 2019 This paper was published in the Journal of International Economic Law on 6 December 2019. Unfortunately, the published version excluded many of the pertinent footnotes that lawyers love and that, more importantly, support key elements of the argument. For this reason we make the full version of the paper available here. 1 Professor of International Trade and Economic Development, Department of Economics, University of St. Gallen, Switzerland, and Coordinator, the Global Trade Alert, the independent commercial policy monitor. I thank Patrick Buess, Johannes Fritz, Maxime Kantenwein, and Piotr Lukaszuk for help preparing the empirical evidence for this paper. I thank Anne van Aaken, Chad Bown, Andrew Lang, two referees, and Piotr Lukaszuk for comments on an earlier draft of this paper. I also thank Doug Irwin, Kevin O’Rourke, and Niko Wolf for checking my characterisation of the economic history literature on trade policy developments in the 1930s. All remaining errors are mine. Comments are welcome and should be sent to [email protected]. 2 Founder of the new non-profit Foundation to house the Global Trade Alert and other commercial policy- related initiatives. Abstract The extent to which the Sino-US trade war represents a break from the past is examined. This ongoing trade war is benchmarked empirically against the Smoot-Hawley tariff increase and against the sustained, covert discrimination by governments against foreign commercial interests witnessed since the start of the global economic crisis. The Sino-US trade war is not the defining moment that some contend. Thus, laying the blame for the current woes of global trade entirely at the feet of policymakers in Beijing or Washington, D.C., is unfounded. Since the rot started well before 2018 and implicates many states, greater attention should be given to the factors determining the unilateral commercial policies of governments during and after systemic economic crisis. The insights presented here from the economic history literature of the 1930s presented here are useful in this regard. Moreover, claims that existing multilateral trade rules have bite are hard to square with the very large shares of global trade affected by policy measures favouring local firms implemented over the past decade. When confronted with severe adverse economic conditions for better or for worse, WTO members had plenty of policy space after all. 2 of 26 1. Introduction “Compared to what?” is a question frequently asked in the design of economic research projects. At best, the systematic comparison of choices sharpens our understanding of underlying causes and their consequences in both quantitative and qualitative analyses of decision-making. In the context of trade policy, in particular in the context of steps taken by governments to discriminate against foreign commercial interests, a frequent point of reference is the Smoot-Hawley tariff enacted by the United States in 1930. The power of this point of reference was demonstrated at the beginning of the global financial crisis of 2008-9 when policymakers, including those meeting in fora such as the Group of Twenty (G20), argued that governments should take on board the “lessons of history.” This mantra became so pervasive in the years that followed that one leading economic historian devoted an entire book to the “uses and misuses of history” (Eichengreen 2014). In trade policy discourse there is a fixation with the Smoot-Hawley tariff (Evenett and Fritz 2017a). For better or for worse, this act of blatant unilateralism by the United States in 1930 has defined the benchmark for bad behaviour in international trade policy ever since. Moreover, reference to the Smoot-Hawley tariff has been used as a rhetorical device to condemn certain trade policy decisions (such as the America First policies) or to diminish the significance of the many steps to consciously favour local firms witnessed since the global financial crisis. Whether the Smoot-Hawley tariff is a sensible point of reference for contemporary events is rarely pondered. Nor does there appear to be much consideration of whether the data exists to allow a comprehensive comparison between contemporary policy choice and the Smoot-Hawley tariff. Furthermore, even if a trade policy decision was “found” to be “smaller” than the Smoot-Hawley tariff, it is far from clear what to make of such a finding. The decision in question may still be significant on some other, legitimate criteria. It was, therefore, with considerable trepidation that I embarked on a comparison between the Sino-US bilateral trade war3 that began in 2018 and the Smoot-Hawley tariff. After all, the total value of US-China bilateral goods trade in 2017, the year before the recent trade war started, was only 4.2% of world goods trade. In addition, this bilateral trade war has not yet resulted in other governments raising tariffs to the same degree, begging the question as to whether it is sensible to compare the bilateral Sino-US trade war of 2018-9 with the pervasive trade discrimination seen in the 1930s. The fact that, as of this writing, the Sino-US trade war is ongoing gave me pause too. I cannot rule out that some findings presented here may well be overturned by events.4 Still, such is the 3 Some object to the term “trade war” being employed to describe the current confrontation between China and the United States, advancing the argument that the former is a manifestation of the emerging geopolitical rivalry between the latter two nations (Gros 2019). I do not deny that there may be significant geopolitical factors at work but will focus here specifically on the commercial policy actions taken by both protagonists. 4 The possibility that the current bilateral trade war spreads and eventually implicates other nations cannot be ruled out. In which case, the analyses of Ossa (2014) and Nicita and others (2018), which simulate a complete breakdown in international trade cooperation between nations, may serve as useful points of reference. 3 of 26 apparent shock to trade policy norms represented by this trade war that, even if settled very soon, it is likely to be analysed for years to come. My assessment of the ongoing Sino-US trade war was informed as much by the way in which economic historians have thought about the critical trade policy choices made in the 1930s as by the magnitudes involved. As will become evident, there are interesting parallels between the genesis of the Smoot-Hawley tariff and the origins of the America First trade policies of the Trump Administration. Whether the US-China trade war, as it currently stands, implicates the same shares of global commerce as the trade discrimination of the 1930s is doubtful. Moreover, even if President Trump’s threats to raise tariffs on all Chinese imports come to pass, the value of trade thereby affected pales when compared to the covert commercial discrimination that has built up over the past decade. One contribution of this paper is to systematically compare the scale of the Sino- U.S. trade war with the goods trade affected by the accumulation of protectionist silt over the past decade. The remainder of this paper is organised as follows. In section two I summarise the “lessons from history” concerning the 1930’s “trade policy disaster,” as put forward by leading mainstream economic historians. I then reflect on their framing of the key decisions and consider their contemporary relevance. This sets up my point of departure from recent literature on the Sino-US trade war, which has tended to focus on scaling and estimating the impact of more transparent trade policy interventions (Bown 2019 being a recent example). In the third section of this paper I present evidence of the Sino-US trade war comparing the policy choices made with those that immediately preceded it. This permits a multi-faceted assessment of the scale of Sino-US trade war. In section four, I draw implications for the understanding of trade policy choice in extremis. 2. The Smoot-Hawley tariff as a point of reference.5 The Smoot-Hawley tariff was signed into US law in June 1930. While claims are frequently made in the public discourse that the associated tariff increases were prompted by special interest lobbying, were a cause of the Great Depression, and induced widespread retaliation by foreign trading partners and an ensuing trade war, in fact, each of these arguments have been contested by leading mainstream economic historians (Irwin 2011, 2012, Eichengreen 2014, Temin 1989, to name a few.) Their research suggests a different interpretation of the causes and consequences of this high-profile, unilateral U.S. trade policy act. In what follows I summarise their most pertinent findings. The origins of the Smoot-Hawley tariff lay in Republican Party commitments to win votes in the agricultural sector during the 1928 election. The duties were set in legislation that passed the House of Representatives in May 1929, months before the U.S. economy peaked and its stock- market crashed. The enacted legislation raised the average tariff rate on dutiable imports by less 5 As will be evident, this account is heavily influenced by Irwin (2011, 2012) and Temin (1989). 4 of 26 than seven percentage points (from around 38% to 45%). At that time, only a third of U.S. imports paid duties. The total value of dutiable U.S. imports was only 1.4% of national income (Irwin 2012). The small share of U.S. spending on dutiable imports, the modest increase in tariff rates (as compared to some previous U.S.

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