UPSC CURRENT AFFAIRS – 04th April 2025
How Smoot-Hawley Tariff Act deepened the Great Depression
Why in News?
Impact of Trump’s tariffs on India-US trade relations amid comparisons to the Smoot-Hawley Tariff Act of 1930.
Introduction
- US President Donald Trump’s recent tariff hikes, particularly the 10% blanket tariff on all countries and reciprocal higher tariffs on nations with large US trade deficits, have raised concerns about a potential global trade war.
- The move has drawn comparisons with the Smoot-Hawley Tariff Act of 1930, which deepened the Great Depression by triggering retaliatory tariffs worldwide.
The Smoot-Hawley Tariff Act of 1930
- Objective: Originally aimed at protecting American farmers and businesses from foreign competition amid falling agricultural prices.
- Provisions: Raised import duties on over 20,000 goods, imposing aggressive tariffs on approximately 25% of all US imports.
- Economic Impact:
- Prompted retaliatory tariffs from major trading partners, including Canada and European nations.
- US imports from Europe fell from $1.3 billion in 1929 to $390 million in 1932.
- US exports to Europe plummeted from $2.34 billion in 1929 to $784 million in 1932.
- Global trade declined by 66% between 1929 and 1934, exacerbating the Great Depression.
Trump's Tariff Strategy and the Smoot-Hawley Parallel
- Higher Reciprocal Tariffs: The 27% tariff on India, 34% on China, and 32% on Taiwan signal a return to protectionist trade policies.
- Market Impact: Announcements led to a 1,450-point drop in the Dow Jones Industrial Average, a 5.8% fall in the Nasdaq, and a 6% decline in oil prices.
- Potential for Retaliation: Countries affected by higher US tariffs may impose their own countermeasures, disrupting global trade and supply chains.
Key Differences Between Smoot-Hawley and Trump's Tariffs
Aspect | Smoot-Hawley (1930) | Trump’s Tariffs (2025) |
Economic Context | Great Depression aftermath | Post-pandemic recovery and geopolitical tensions |
Tariff Scope | 25% on 20,000 goods | 10% blanket tariff + higher tariffs on trade-deficit countries |
Retaliation Risk | Immediate global backlash | Unfolding but likely due to trade deficits with key nations |
Trade Share in GDP | US imports = 5% of GDP | US imports = 14% of GDP (three times higher) |
Potential Impact on India-US Trade Relations
- Short-term Disruptions:
- Higher tariffs on Indian auto components, gems, and jewelry could impact export earnings.
- US concerns over India’s tariff structure and non-tariff barriers may strain trade negotiations.
- Opportunities for India:
- Tariffs on China (54%) and other Asian countries could shift supply chains in India’s favor, particularly in textiles and manufacturing.
- India could leverage bilateral trade agreements to secure tariff reductions for key exports.
- Long-term Implications:
- If retaliatory measures escalate, it may undermine global trade stability and slow economic growth.
- A strategic response, such as diversifying export markets and strengthening domestic manufacturing, will be crucial for India’s economic resilience.
Conclusion
- Trump’s tariffs reflect a shift towards economic nationalism that could disrupt global trade patterns.
- While the Smoot-Hawley comparison underscores the risks of protectionism, India’s ability to capitalize on shifting supply chains and navigate trade negotiations will determine its position in the evolving global trade order.
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