First World War saw the making of America. With the sudden pick up of it’s industrial capabilities, it is but obvious that it needs markets for consumption. So, what will anyone do? First act is to create a domestic market by restricting imports. Then, impose it’s will on the weak. That is exactly what America did.
By 1920, Europe started recovering from the effects of the World War and American produce had a far lesser market to sell it’s wares. To counter this, America increased the tariff levels for import in 1921 under Fordney–McCumber Tariff Act. This skewed the market in favour of American companies but, taking this as a precedent, all major countries increased import duties drastically. By the expansion of the level of industrialization, the supply demand equation got further skewed and America responded to this by increasing the tariffs even more.
This second round, named, An Act to provide revenue, to regulate commerce with foreign countries, to encourage the industries of the United States, to protect American labor, and for other purposes or in short, Smoot–Hawley Tariff Act is more significant because this act came in the face of a League of Nations Report of 1927 which asked for a free market. This time, the powder keg was lit by the French in 1928 and the Americans only responded. This bill, passed with overwhelming majority is a clear example how people with no knowledge in economics decide what is right for the country agaisnt the wishes of the relevant simply because they felt it is right. The proof of this lies in the fact that almost all of the American economists and industrialists and even the President opposed the bill.
Almost immediately, at least 23 trade partners of America protested and retaliated by increasing tariffs against the American products. The hardest hit, Canada, imposed new tariffs on American products and then convened the British Empire Economic Conference where highest preference is given to the local produce, next to entities of British Empire(called Imperial Preference or Empire Free Trade) and last to everyone else. Coupled with the collpase of Rotschild’s Creditanstalt, Germany gave way to Hitler.
This act worked for the initial days but the economy collapsed almost immediately. US imports decreased 66% from $4.4 billion (1929) to $1.5 billion (1933), and exports decreased 61% from $5.4 billion to $2.1 billion. GNP fell from $103.1 billion in 1929 to $75.8 billion in 1931 and bottomed out at $55.6 billion in 1933. Imports from Europe decreased from a 1929 high of $1.3 billion to just $390 million during 1932, while US exports to Europe decreased from $2.3 billion in 1929 to $784 million in 1932. Overall, world trade decreased by some 66% between 1929 and 1934.
This was corrected by passing Reciprocal Trade Agreements Act where government can bypass Smoot–Hawley Tariff Act on a country to country basis. Paralell to this, pressure was put on Canada to roll back Imperial Preference. This slowly, brought the economy back to control but the damage is already done since the wheels started turning for the Second World War.