The Tragedy of the Trade War in 1930

Report Summary

(1) The Smoot-Hawley Tariff Act of 1930

The Smoot-Hawley Tariff Act raised tariffs on over 20,000 goods by an average of 20% in the name of "protecting domestic industries," increasing U.S. tariffs from 13.5% in 1929 to 19.8% in 1933; the average tariff on taxable goods (which accounted for 34%) rose from 40% in 1929 to 59% in 1932. This also triggered retaliation from multiple countries, causing the scale of U.S. and global trade to shrink by about two-thirds, significantly exacerbating the global Great Depression. It wasn't until June 1934, when Roosevelt signed the Reciprocal Trade Agreements Act, that this chaotic history came to a complete end.

(2) Tariff Wars and the Great Depression

In fact, when the bill was officially implemented (June 1930), the "Great Depression" had already been underway for some time (starting in August 1929). The causes of the Great Depression were: (1) the stock market crash in October 1929, with the Dow Jones dropping 39% in half a month; (2) bank runs leading to the collapse of the banking system and a reduction in money supply; (3) the constraints of the gold standard, with the Federal Reserve failing to inject liquidity into the market in a timely manner and instead passively contracting the money supply; (4) the tariff law exacerbated what could have been a relatively "ordinary" recession.

(3) Economic Performance During the Great Depression

During the Great Depression, the U.S. economy collapsed, with exports being just one aspect. From August 1929 to March 1933, U.S. nominal GDP fell by 45%, with personal consumption down 41%, private investment down 87%, and exports down 67%; the CPI index dropped by 24%, and real interest rates exceeded 12%; the unemployment rate rose from 3.2% in 1929 to 24.9% in 1933.


(4) Capital Market Performance During the Great Depression

(1) Major assets: Gold (+27.6%) > US Dollar (+14.6%) > US Treasuries (+12.9%) > Housing (-24.3%) > Prices (-26.6%) > Silver (-34.0%) > Crude Oil (-47.2%) > Copper (-60.5%) > S&P 500 (-80.4%) > Dow Jones (-85.2%). (2) Stock market downturn turning points: Hoover's inauguration, bill passed by the House of Representatives, bill passed by the Senate, bill officially enacted. (3) Stock market bottom turning points: Roosevelt's inauguration, abandonment of the gold standard, monetary easing. (4) Industry performance: The relatively safe variety is tobacco, with a decline of -27.6%; more than half of the industries saw declines of over 80%.

(5) What are the differences in the current trade war?

(1) Efficiency of policy implementation is different. The Smoot-Hawley Tariff Act took over a year to legislate; the current Trump administration only needs to issue executive orders. (2) Economic cycle position is different. In 1929, the U.S. was at the end of the "Roaring Twenties"; currently, the issue of economic overheating is not as prominent. (3) Monetary cycle position is different. In 1929, the U.S. was at the end of interest rate hikes and adhered to the gold standard, limiting monetary easing; currently, the U.S. is in the process of lowering interest rates. (4) Trade dependency is different. In the 1930s, the U.S. had relatively low dependence on global trade; currently, the U.S. has significantly increased its dependence on global trade.

(6) Conclusion (1) Compared to the 1930s, current trade protectionism in the United States is prevalent, but today's world trade is characterized by international value chains, making it more difficult for trade barriers to take real effect; (2) For the U.S. economy itself, the current impact will be far less than in the 1930s, for two reasons: first, the current level of overheating is not as severe as in the late 1920s, and second, the Federal Reserve has more flexible monetary policy space to cope with potential recession or deflation.

Report Body

In March of this year, after Trump officially took office, he immediately launched "Trade War 2.0," and the policies announced so far could raise U.S. tariffs to a century-high. This has significantly heightened market concerns about a recession in the U.S. and even the global economy, with the tariff war from a century ago and the Great Depression becoming one of the extreme risks that could reoccur.

According to calculations by the Tax Foundation, if the Trump administration implements the current tariff policy (as of April 10, 2025, excluding the 90-day tariff relief), the U.S. import tariff rate will rise from 2.5% in 2024 to 11.5% in 2025, the highest level since 1943; additionally, according to calculations by Yale University's Budget Lab, if all tariffs effective in 2025 are considered, U.S. import tariffs will rise to 22.4%, exceeding the tariff levels under the Smoot-Hawley Tariff Act of the 1930s.

I. Dreaming Back to the Trade War of the 1930s

(A) The Unintended Consequences of the Smoot-Hawley Tariff Act

The Smoot-Hawley Tariff Act of 1930 is one of the most notorious pieces of legislation in American history. Although this act was named in the interest of "protecting domestic industries," it triggered retaliatory trade barriers from dozens of countries worldwide, causing the scale of international trade to shrink by about two-thirds between 1929 and 1932, exacerbating the global Great Depression and even laying the groundwork for the outbreak of World War II The bill passed: The Smoot-Hawley Tariff Act originated from Hoover's campaign promise during the 1928 presidential election: to help farmers by raising import tariffs on agricultural products to address the issue of agricultural surplus.

• On March 4, 1929, President Hoover took office;

• On May 28, 1929, the bill was passed by the U.S. House of Representatives;

• On March 24, 1930, the bill was passed by the Senate;

• On June 17, 1930, President Hoover signed the bill.

• It wasn't until June 1934, when President Roosevelt signed the Reciprocal Trade Agreements Act, which lowered tariff levels and promoted trade liberalization and cooperation with foreign governments, that this chaotic history was completely brought to an end.

Impact of the bill:

The bill raised tariffs on more than 20,000 goods by an average of 20%. The overall tariff rate in the U.S. increased from 13.5% in 1929 to 19.8% in 1933, an increase of 6.3 percentage points. It also triggered retaliatory measures from foreign governments; within two years, about twenty countries adopted similar "beggar-thy-neighbor" tariffs, further reducing global trade. Between 1929 and 1932, both U.S. and international trade volumes shrank by about two-thirds.

Trade War and the Great Depression:

In fact, at the time the bill was signed, the U.S. economy was already in a recession. According to the NBER classification, the Great Depression lasted from August 1929 to March 1933. The introduction of the Smoot-Hawley Tariff Act led to a loss of confidence on Wall Street and signaled American isolationism, causing many overseas banks to begin failing, which exacerbated the economic downturn.

Tariff Levels:

Under the Smoot-Hawley Tariff Act and the effects of deflation, the overall tariff rate in the U.S. increased from 13.5% in 1929 to 19.8% in 1933, an increase of 6.3 percentage points. If we look only at the 34% of taxable goods, the average tariff on taxable imports rose from 40% in 1929 to 59% in 1932, an increase of 19 percentage points.

(2) The Smoot-Hawley Tariff Act and the "Great Depression"

When the Smoot-Hawley Tariff Act was implemented (June 1930), the "Great Depression" had already been underway for some time (since August 1929). The period before the Great Depression was known as the "Roaring Twenties," a time of industrial growth and social development There are generally several explanations for the causes of the Great Depression:

(1) Stock Market Crash in October 1929:

Margin trading was prevalent (10-20% margin), from October 24 (Black Thursday) to November 14, in just 14 trading days, the Dow Jones fell by 39%;

(2) Collapse of the Banking System:

Banks went bankrupt due to loan defaults and the stock market crash, leading to bank runs. In response to the runs, banks drastically reduced loans, resulting in a collapse of the money multiplier and a decrease in money supply;

(3) Constraints of the Gold Standard:

The Federal Reserve failed to inject liquidity into the market in a timely manner, instead passively contracting the money supply to maintain the gold standard (to prevent gold outflows). The rise in real interest rates (due to deflation expectations) suppressed investment and consumption. Countries were forced to tighten fiscal policies to maintain their gold reserves and fixed currency ratios, exacerbating global deflation;

(4) Smoot-Hawley Tariff Act:

The tariff act exacerbated what could have been a relatively "standard" recession. The tariff war led to a two-thirds decline in trade volume, currency devaluation in various countries, capital flight, and ultimately accelerated the regression of economic globalization and political extremism.

(3) Economic Collapse, Exports are Just One Aspect

During the Great Depression in the United States (1929-1933), the economic data of the U.S. completely collapsed:

(1) Nominal GDP fell by 45%, with personal consumption expenditures down 41%, private investment down 87%, and exports down 67%. The tariff war led to a two-thirds decline in trade volume, while the suppression of personal consumption and private investment during the Great Depression was also very evident.

(2) The CPI index fell by 24%, and real interest rates exceeded 12%. A severe deflation occurred during this period, leading to a serious vicious cycle, including rising real interest rates, reduced investment and consumption, a decrease in money supply (down 25%), and passive increases in import tariffs (on quantity goods), etc.

(3) The unemployment rate surged from 3.2% in 1929 to 24.9% in 1933, reaching a historical high. After that, the unemployment rate in the U.S. rarely exceeded 10%, even during the stagflation period of the 1970s.

(4) The Constraint of the Gold Standard on Monetary Easing

In the early stages of the 1929 crisis, the Federal Reserve raised interest rates multiple times to attract international capital inflows (to prevent gold outflows) and curb stock market speculation. In September 1929, the discount rate rose to 6.0%, and in October, the stock market crashed, leading to the collapse of the asset bubble.

Starting in 1930, the Federal Reserve continuously lowered the discount rate, which fell to 1.5% by 1931. However, constrained by the gold standard, the Federal Reserve's monetary easing policy experienced fluctuations; it wasn't until the Roosevelt administration abandoned the gold standard in 1933 that monetary policy could be further eased. The discount rate was again lowered to 1.5% in 1934 and to 1.0% in 1937, remaining at that level until 1947.

In 1942, in response to government spending during World War II, the U.S. began implementing the YCC policy, setting the yield on short-term Treasury bills at 0.375% and the yield on long-term government bonds at 2.5%.

II. Performance of Major Asset Classes During the Trade War

(1) Timeline of the Smoot-Hawley Tariff Act and Stock Market Trends Review

During the Great Depression, the turning points for the decline of the U.S. stock index were: (1) Hoover took office, and the bill passed the House of Representatives; (2) the bill passed the Senate; (3) the bill officially took effect.

The turning points for the U.S. stock index hitting bottom during the Great Depression were: (1) Roosevelt took office; (2) abandonment of the gold standard and monetary easing.

(2) Performance of Major Asset Classes During the Great Depression

According to NBER classification, the Great Depression lasted from August 1929 to March 1933 During the Great Depression, in terms of major asset classes: Gold (+27.6%) > US Dollar (+14.6%) > US Treasury Bonds (+12.9%) > Housing (-24.3%) > Prices (-26.6%) > Silver (-34.0%) > Crude Oil (-47.2%) > Copper (-60.5%) > S&P 500 (-80.4%) > Dow Jones (-85.2%).

Among them, the rise in gold was due to its safe-haven properties, while the rise in the US dollar was due to the UK abandoning the gold standard and easing monetary policy earlier.

(3) Industry Performance During the Great Depression

From an industry perspective, all sectors declined, with no exceptions; the relatively safe-haven variety was tobacco, with a decline of -27.6%; more than half of the industries had declines exceeding 80%; there were two industries with declines exceeding 90%: Wholesale (-93.6%), Entertainment (-94.3%).

(4) Major Asset Performance During Bear Markets

Using the bear market phase during the Great Depression (from September 3, 1929, to July 8, 1932) as the statistical time window.

During the bear market, in terms of major asset classes: US Dollar (+38.5%) > US Treasury Bonds (+10.8%) > Gold (+0.3%) > Housing (-21.3%) > Prices (-21.4%) > Crude Oil (-31.5%) > Silver (-47.2%) > Copper (-68.4%) > S&P 500 (-86.1%) > Dow Jones (-89.2%).

(5) Industry Performance During Bear Markets

From an industry perspective, during the bear market, the relatively safe-haven variety was tobacco, with a decline of -29.9%; industries with significant declines included: Wholesale, Entertainment, Electrical Equipment, Coal, Finance, etc

3. What are the differences in the current trade war?

(1) Different policy implementation efficiency

In 1929, after Hoover took office, it took more than a year of legislative procedures for the Smoot-Hawley Tariff Act to be officially signed.

In 2025, after Trump took office, he mainly invoked the International Emergency Economic Powers Act (IEEPA), the National Emergencies Act (NEA), Section 301 of the Trade Act of 1974, and Section 232 of the Trade Expansion Act to promote the trade war quickly through executive orders, bypassing the lengthy legislative process in Congress.

(2) Different economic cycle positions

In 1929, the U.S. economic cycle was at the end of the rapid growth and expansion of the "Roaring Twenties," with serious issues of accumulated debt and overcapacity.

In 2025, the U.S. economic cycle was in a year of normalization after the pandemic, with less prominent issues of economic overheating.

(3) Different monetary cycle positions

In 1929, the U.S. monetary cycle was at the end of a rate hike cycle, and it adhered to the gold standard, limiting the space for monetary easing.

In 2025, the U.S. monetary cycle was in the middle of a rate cut cycle, with expectations for about three rate cuts (75bp) remaining for the year.

 Different Levels of Trade Dependence

In the 1930s, the United States had a relatively low dependence on global trade and a significant trade surplus.

In the 2020s, the United States has significantly increased its dependence on global trade and has a large trade deficit.

Overall:

(1) Compared to the 1930s, current U.S. trade protectionism is more pronounced, and the speed at which the president introduces trade barrier policies is faster. However, current world trade is characterized by international value chains, and forcibly advancing trade barriers could disrupt or even break supply chains, making real implementation more difficult.

(2) For the U.S. economy itself, the impact of the current trade war will be much smaller than in the 1930s, for two reasons: first, the current level of economic overheating is not as severe as in the late 1920s, and second, the Federal Reserve has more flexible monetary policy space to cope with potential recession or deflation.

Authors of this article: Liu Chenming, Zheng Kai, et al. Source: Chenming's Strategic Deep Thinking, Original Title: "[GF Strategy] The Pain of the 1930 Trade War"

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