On Thursday, President Donald Trump said that he would be imposing tariffs for aluminum and steel. The move has almost no support among economists, including his advisors, with the notable exception of Peter Navarro, the director of the National Trade Council. For most economists, the 25% steel and 10% aluminum tariffs Trump is set to sign next week is accompanied by a sense of déjà vu.
In 1930, the Smoot-Hawley Tariff Act raised tariffs on 20,000 goods Americans bought from abroad. Imports fell significantly, but Canada and other countries retaliated and a trade war ensued, crushing exports and worsening the Great Depression.
It’s unlikely many remember the specifics. You’d have to be over 80 to remember Smoot-Hawley firsthand, and perhaps over 45 to have learned about it in school.
But Smoot-Hawley is likely buried in your subconscious, somewhere. This policy, after all, was the lesson taught in the 1986 movie “Ferris Bueller’s Day Off” by economist, speechwriter, game-show host, conservative pundit and sometime actor Ben Stein while Ferris was on the loose.
To his sleeping classroom, the teacher, played by Stein, has a monologue:
“In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the… Anyone? Anyone?… the Great Depression, passed the… Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act,” droned Stein, as students chewed gum, drooled, and slept. “Which, anyone? Raised or lowered?… raised tariffs, in an effort to collect more revenue for the federal government. Did it work? Anyone? Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression.”
With Trump’s economic protectionism coming back in vogue, Stein, a Trump supporter, sees the Smoot-Hawley (or Hawley-Smoot) lesson as just as relevant today.
“This is one of Mr. Trump’s worst ideas,” Stein said in an interview with Yahoo Finance. “He has a number of not-very-good ideas, he has a number of bad ideas, and a number of very good ideas. Protectionism is probably the single worst idea.”
For Stein, a free-tradist who is no stranger to policy as a former speechwriter for Presidents Nixon and Ford, restricting imports and inhibiting trade could present a massive problem similar to the 1930 situation.
“There will be retaliation. Mr. Trump is looking for a trade war and he’s going to get it,” said Stein in the same mild manner as his Bueller monologue. “All these countries are not going to be pushed around.”
A Goldman Sachs analyst note circulated on Thursday warned of this possibility, and said the tariffs are not based in economic arguments but rather national security ones.
“This could lead to other trading partners taking similar actions and could ultimately weaken the international trade conventions, like WTO rules, more generally,” the note said.
In Stein’s view, this tariff, created to help domestic manufacturing and finance Trump’s wall, would simply result in companies passing the costs to consumers. In other words, the American consumers will pay the tariff, and for the wall.
“Everyone is a consumer in America. Not everyone is in the manufacturing business,” said Stein, putting the number of manufacturing workers at around 8% amid record-high output. “Most of the ones who lost their jobs lost them to automation, not foreign competition. So that whole thing was a bogus issue to start with and the idea of using tariff barriers to protect American workers is a disaster. This is wholly unnecessary provocation and a slap to the consumer.”
Since Trump’s victory, the markets have rallied despite fears of protectionism and higher prices for imported goods. As Stein and others note, this is mainly due to hopes of lower corporate tax rates and lax regulation, two factors that outweigh a border tax.
That border tax or tariff, however, may not be about economic policy, but rather Trump’s wall. Instead of asking Congress to use American tax dollars, a tariff would make it look as if companies—and Mexico—would be paying for it, even though the bill would be paid through higher prices for consumers. It would also mean the return to a fairly vanilla Republican economic policy of trickle-down economics that’s at odds with the populist message of leveling the playing field for the “forgotten man.”
“The whole idea of having Mexico pay for the wall was so ridiculous in the first place I don’t even know where to begin,” said Stein. “It’s a batty idea. I mean I like Trump, I voted for Trump, I would vote for him again, but this whole protectionism thing is just a terrible idea and the idea of having Mexico pay for the wall just makes no sense at all.”
According to Stein, globalization and free trade are inevitable, and he doesn’t think these tariffs will actually happen. “That’s the way of the world,” he said. “We should be giving money to those workers to be retrained with new skills instead of punishing all American consumers.”