On Wednesday, President Donald Trump revealed a new set of global tariffs, implementing a minimum 10% tax on imports from various countries worldwide. He stated that this initiative aims to bolster the U.S. economy and address what he describes as “unjust trade practices.”
During his address, Trump claimed that the Great Depression “would have never occurred” if the U.S. had upheld a strong tariff policy at that time, adding that efforts to reintroduce tariffs later on failed to save the country.
However, these claims have been challenged by Dean Baker, senior economist and co-founder of the Center for Economic and Policy Research.
“We had not eliminated tariffs before the Great Depression,” Baker stated. “There was a slight reduction, but that happened many years earlier.”
In fact, Congress enacted the Smoot-Hawley Tariff Act in 1930, intending to ramp up tariffs to raise federal revenue and combat the Depression, but historians and economists largely agree that the act exacerbated the economic downturn: It deepened the crisis and drove up prices.
“I have literally never heard anyone suggest that [the absence of tariffs caused the Depression] and cannot fathom how that would have worked,” Baker remarked.
The White House has not provided a comment on this matter.
Examining the Actual Causes of the Great Depression
Historians identify several factors that contributed to the Great Depression, including the stock market crash in 1929, which was influenced by overproduction in certain sectors post-World War I and monetary policy efforts to curb market speculation, as per a historical analysis by the Federal Reserve.
The Fed’s attempts to control speculative investment resulted in fewer consumers borrowing funds, creating a decline in economic activity.
Leading up to the Depression, tariffs remained relatively low, Baker notes. The U.S. began collecting federal income taxes in 1913 to reduce its dependence on tariffs, which had previously provided up to 90% of federal revenue, according to Dartmouth College economist Douglas Irwin.
By 1930, with federal income tax in effect, tariffs accounted for less than 20% of federal revenue, as reported by the Council of Economic Advisers during President Joe Biden’s administration.
The Failure of Tariffs to Mitigate the Great Depression
In 1930, as the Senate endorsed the Smoot-Hawley Tariff Act, the U.S. imposed tariffs on thousands of imported products to assist American farmers struggling to compete after European agricultural production rebounded post-World War I.
While several previous tariff acts were primarily concerned with agricultural support, Smoot-Hawley broadened to increase tariffs across “all sectors of the economy,” according to the State Department’s Office of the Historian.
Nevertheless, these duties triggered a trade war, with countries retaliating by raising their own tariffs on U.S. goods, ultimately paralyzing international trade, as noted by the Senate Historical Office.
The disruption to global trade worsened the Depression, leading to increased prices on life essentials such as food.
“Nearly all economists concur that the Smoot-Hawley tariffs worsened the Depression,” Baker asserted. At the time, many experts advised President Herbert Hoover against signing the Smoot-Hawley Tariff Act, with over 1,000 economists petitioning him not to proceed. However, Hoover signed it regardless.
Looking ahead to 2025, while experts believe that the U.S. economy is in a better position than it was a century ago, Trump’s tariffs are already posing risks to future growth and significantly heightening the likelihood of a recession, according to Baker.
‘Money Taken Directly from Consumers’
According to Baker, tariffs can lead to a recession in several ways. Primarily, they act like an extra tax on consumers. “This is money taken directly from people’s pockets, reducing their spending capacity,” he explained.
Aside from creating stress and uncertainty for consumers, businesses may delay investments until they have a clearer understanding of the tariffs’ effects and duration, Baker noted.
“Many individuals expedited purchases of major items like cars and appliances to avoid the tariffs,” he remarked. He anticipates a slowdown in such spending “as they are unlikely to make those big purchases again soon.”
Furthermore, Baker commented that “this policy is unlikely to yield many beneficiaries.” He stated, “Some businesses may profit from trade barriers, but they will be a minority.” Companies utilizing few imported components may navigate this period with minimal disruption, but this is “a relatively small group,” according to Baker.
Are you seeking a new career that offers better pay, flexibility, or fulfillment? Enroll in CNBC’s new online courseHow to Change Careers and Be Happier at Work. Expert instructors will guide you through strategies for effective networking, resume revamping, and confidently transitioning into your dream career. Pre-register today and apply coupon code EARLYBIRD for a 30% introductory discount on the $67 fee (+taxes and fees) until May 13, 2025.
Plus, subscribe to CNBC Make It’s newsletter for tips and strategies for achieving success in your career, finances, and overall life.
