Why Trump’s new tariffs echo the 1930 law causing Great Depression

As President-elect Donald Trump recently announced sweeping new tariffs on imports from Washington’s three biggest trading partners – Mexico, Canada and China – many economists see it as a disaster in the making.

Colin Grabow, associate director at the Cato Institute’s Herbert A Stiefel Centre for Trade Policy Studies, tells TRT World that Trump would make a “serious mistake” by increasing tariffs on imports from Canada and Mexico.

The US accounted for more than 83 percent of exports from Mexico in 2023 and 75 percent of Canadian exports.

Cato Institute and its affiliated experts promote the libertarian school of economic thought that favours minimal state intervention in the free market and the private lives of citizens—ideas that have ready takers within the core support base of Trump and his Republican Party.

“Beyond the harm to (US) consumers through higher prices, such tariffs will also reduce the competitiveness of US companies through both higher input costs and the inevitable retaliatory tariffs,” Grabow says.

Trump has vowed to slap a 25 percent tariff on imports from Canada and Mexico until they crack down on drugs and migrants crossing the border, raising the spectre of a scenario akin to the protectionist policies that defined the Great Depression of the 1930s.

Separately, the president-elect wants to impose an “additional 10 percent tariff” on all imports from China that will be over and above the import duties currently in place.

The proposed tariffs have alarming similarities to the 1930 Smoot-Hawley Tariff Act, a piece of legislation introduced in Congress in 1929 and passed in 1930. It raised US import duties on 20,000 goods by 20 percent ostensibly to protect American farm and industrial workers from foreign competition.

Instead, the legislation triggered retaliatory tariffs from trading partners and slashed international trade volume by 66 percent between 1929 and 1934.

Within a few years, the US economy sank deeper into recession, with unemployment soaring to the unprecedented level of nearly 25 percent.

According to Steve Forbes, chairman and editor-in-chief of the Forbes Media, the Great Depression—the longest and severest global economic downturn (1929-39) that originated in the US—was a “product” of the Smoot-Hawley Tariff Act.

“What it produced was a trade war that made countless products unaffordable. Consumers simply stopped buying. Manufacturers had to cut back on employment. Millions of jobs were destroyed. Profits shrivelled and investment capital dried up, undermining banks and precipitating the economic slump,” Forbes wrote in one of his books on the evolution of capitalism.

Mutually destructive tariff war

Economic studies show tariffs often lead to higher costs for consumers and businesses, reduced export competitiveness and a decline in overall economic growth.

China, which is the third biggest trading partner of the US, has warned Washington that the proposed measures could drag two of the world’s largest economies into a mutually destructive tariff war.

Similarly, Mexico has vowed to retaliate to the imposition of new tariffs, a move that could potentially kill 400,000 US jobs and drive up prices for US consumers.

Almost nine of every 10 pickup trucks sold in the US are made in Mexico. The average price of these vehicles, popular in the rural areas with a higher concentration of Trump supporters, is expected to go up by $3,000, according to Mexican Economy Minister Marcelo Ebrard.

Dr Donald J Boudreaux, another libertarian US economist who previously served as chairman of the economics department at George Mason University, also called Trump’s proposed tariffs a “mistake”.

“These tariffs will raise prices paid by American consumers, and raise costs of many American producers, as many American imports are inputs used in US production,” he tells TRT World.

For starters, the proposed tariffs would “violate” the US-Mexico-Canada Agreement (USMCA) that Trump himself negotiated to replace the North American Free Trade Agreement (NAFTA) in 2020, he says. The USMCA is up for review in 2026.

More than a fifth of the oil processed by US refiners is imported from Canada. The proposed tariff will drive up fuel prices for Americans by an average of 10 percent.

Major oil trade groups like the American Fuel and Petrochemical Manufacturers and the American Petroleum Institute have also termed the planned tariffs a “mistake” that will make energy significantly more expensive in the US.

“Trump wants to use these tariffs to somehow prompt Mexico and Canada to solve American problems that have little to nothing to do with trade—namely, illegal drug use and immigration,” Boudreaux of George Mason University says.

“In fact, because these tariffs will reduce opportunities for good jobs in Mexico, they might as well increase the flow of undocumented immigrants into the US,” he adds.