Donald Trump, Free Trade, and the Great Depression

Donald Trump talks a mean game when it comes to besting foreign competition, but his arguably anti-trade policies have been tried before -- with devastating results. Were he to become president, Trump’s trade policies could usher in a second Great Depression, to follow Obama’s weak economic recovery.

Trump calls himself “a 100% free trader,” but he cannot think of a single trade deal in recent American history that he likes. As the Wall Street Journal’s Joseph Rago noted, “his campaign hasn’t tapped a protectionist vein so much as the mother load.” According to Trump, his objection is not to trade deals in themselves but to “the disinclination of the U.S. government to leverage tariffs to obtain terms more favorable to the U.S -- and especially to take on the Chinese,” Rago explains.

The last American president who used tariffs to gain leverage in international trade was Herbert Hoover -- a man infamously connected with the worst economic slump in American history. While popular wisdom says the Great Depression resulted from the 1929 stock market crash, the market was recovering well in 1930. History reveals that restrictive trade policies and expansive social programs actually caused and prolonged the Great Depression.

While Trump generally opposes New Deal style social programs, his trade policies arguably fall in line with America’s disastrous path toward the Great Depression.

“Everybody is Ripping Us Off”

To hear Trump tell it, America has been taken advantage of. In a recent interview with the Wall Street Journal, Trump raged that China has “made so much money off us...somebody said the exact number is gonna be this year $505 billion.” The Census Bureau places the 2014 U.S. deficit with China at $342.6 billion.

“They’ve taken our jobs, they’ve taken our money, they’ve taken our manufacturing, our base,” Trump fumed. This anger at trading partners traces back at least to 2011, when Trump told Rush Limbaugh: “I look at the way China is just ripping us off, I look at OPEC the way they are ripping us off with the oil prices....With China this year, Rush, we’re gonna lose $300 billion, and that wouldn’t happen if I was there.”

In actuality, trade benefits both partners. Americans have a strong demand for Chinese-built products, and benefit from buying and using them. If the Chinese can produce things at a lower cost, Americans can save money by buying them. While some manufacturing may go overseas, the economy still benefits when more people have access to more goods and services.

According to a Heritage Foundation study, “international trade has boosted annual U.S. income by at least 10 percentage points of GDP relative to what it would have been without global trade, which translates into an aggregate gain of at least $1.7 trillion in 2013, or an average gain of more than $13,600 per U.S. household per year.”

Free trade has proven to be the greatest antidote to poverty in history. In the past thirty years, the spread of free trade has raised nearly 1 billion people out of abject poverty -- as defined by living off of $1 per day. Hundreds of millions in China, India, Asia, parts of Latin America, and sub-Saharan Africa have risen into the middle class.

Trump may not deny the benefits of free trade across the world, but that doesn’t mean he wants America to be part of it. “Decades of disastrous trade deals and immigration policies have destroyed our middle class,” Trump wrote in a recent policy manifesto. According to him, immigration “holds down salaries, keeps unemployment high, and makes it difficult for poor and working-class Americans -- including immigrants themselves and their children -- to earn a middle-class wage.”

Despite some evidence that competition for low-skilled jobs holds down wages, immigrants generally fill niches in the labor market that natives refuse to take part in. Indeed, immigrants add to the overall productivity of the labor force while starting new businesses, notes Stephen Moore and Larry Kudlow. Silicon Valley, for instance, booms due to foreign talent and brainpower.

In the 1980s and 1990s, the U.S. experienced one of the largest recorded waves of legal immigration -- at 20 million immigrants. But the economy did not falter. Rather, from 1983 to 2005, the economy saw the creation of 40 million new jobs, the unemployment rate dropped by half, and middle class living standards grew by almost one third.

Nevertheless, Trump continues to play with fire, arguing that the U.S. should employ tariffs on foreign goods and services to leverage better trade deals. These better deals, he argues, would help America in turn “rip off” other countries. In reality, more trade restrictions would make the economy worse for both partners, as history shows us.

Trade and the Great Depression

As George Melloan writes in the Wall Street Journal, the Great Depression “was caused and prolonged by a number of bad laws enacted first by Republicans and then by Democrats,” with arguably the worst being the 1930 Smoot-Hawley tariff.

When Herbert Hoover became president in 1929, he refinanced 12 regional farm-loan banks which dated back to 1916 to make preferential loans to farmers. This easy lending likely contributed to overproduction, Melloan explains, which drove down prices. Farmers turned to the government for protection, asking for high tariffs on imports -- effectively increasing the price for foreign goods.

After the shock of the 1929 stock market crash, industry and labor joined the farmers in demanding higher tariffs. The bill drafted by Sen. Reed Smoot of Utah and Rep. Willis Hawley of Oregon -- the Smoot-Hawley tariff -- covered about 20,000 different items, and raised the already high average tariff of 25 percent to 50 percent. U.S. trading partners responded -- not by backing down, as Trump would predict -- but by imposing tariffs of their own, shutting down world trade.

Following Smoot-Hawley, U.S. exports fell from $5.2 billion in 1929 to $1.7 billion in 1933. Farmers lost $1 billion in worldwide business.

More than 1,000 U.S. economists petitioned President Hoover not to sign Smoot-Hawley, Melloan explains. Henry Ford called the tariff “economic stupidity,” and J.P. Morgan CEO Thomas Lamont declared it “asinine.” Even Franklin Delano Roosevelt -- who was governor of New York at the time -- opposed it, as did Hoover at first.

Nevertheless, Hoover signed it on June 17, 1930, and the rest is history. As Melloan put it, “the combined effects of declining global trade and New Deal experiments with central planning meant that Americans would suffer a decade of hard times.” After Smoot-Hawley, no Republican would hold the presidency for 20 years.

While such a wide-reaching tariff would be unlikely to pass today, it demonstrates the powerful damage Trump’s proposed limits on trade would likely do. Critics of the Trump-Hoover connection have argued that the U.S. was the largest manufacturing exporter in the world in the 1920s, and therefore retaliation to Smoot-Hawley “was inevitable.”

But if tariffs then forced other countries to retaliate, tariffs today -- when the U.S. is not the largest manufacturing exporter in the world -- would merely prove less effective at forcing other countries to do anything.

Ironically, the Trans-Pacific Partnership (TPP) -- which Trump opposes as “insanity” -- aims to isolate China, as Trump promises to do. Rather than attacking China, TPP encourages trade with other Far Eastern nations, creating an alternate nexus. TPP is exceedingly long and has many secretive elements, thus rightly leading conservatives to mistrust it. It may not be a good deal, but its spirit does not conflict with Trump’s hostility to China.

If we are to take Trump seriously, and if his rhetoric is any hint of what his policy would be, the real estate tycoon might be a very serious threat to the economy. While Trump’s economic policies rightly include cutting the corporate income tax, simplifying and lowering personal taxes, ending the war on coal, and tackling America’s regulatory burden, his opposition to free trade undercuts these selling points.

Trump may have succeeded in business, but his outspoken support for tariffs -- even only as leverage for better trade deals -- would mean bad news for America’s economy.