By John De Goey
It seems few people today know about the Smoot-Hawley Tariff Act of 1930. At that time, one year into the Great Depression, the economies of Canada and the United States were in the dumps and political isolationism ushered in a protectionist trade policy that was prescribed as an antidote to job losses. This Act was passed on June 17, 1930 and it raised import duties in order to protect American businesses and farmers. It was the last legislation under which the United States Congress set tariff rates.
What was the result of the tariffs, which raised import duties on a wide range of agricultural and industrial goods by 20 per cent? Economists everywhere had warned against them and the stock market did not react well. Nevertheless, the prices of most things imported to America rose and only the wealthy could afford them. What’s more, the amount of exported goods decreased significantly and it led to bank failures, among other things.
Because of the tariffs, duties rose so that countries could no longer sell goods to the U.S. and that led to retaliatory tariffs; two dozen countries implemented them. We then saw more bank failures. The upshot of all this was that the Smoot-Hawley Tariff Act was a significant factor in international trade declining by 65 percent between 1929 and 1934.
So now it’s 2025 and here we go again. The only real difference is the reversal of the chicken-and-egg story. In 1930, the economy was in the dumps while today the U. S. economy has been performing well. But as we look back we can see that the 1930 tariffs did more to exacerbate the problem than solve it.
In 2025, a wave of nativism and related protectionist policy are once again giving rise to the imposition of tariffs. As in 1930, most economic experts believe none are needed. But it now looks as though tariffs may well cause a major market downturn. Almost a century ago, tariffs were a policy prescription that abetted the isolationist stance and worsened a downturn that had already started. Could history be repeating?
Here in Canada, based on the way people are behaving, you would never know that our country stands on the verge of a major economic conflict.
On January 22, the Globe and Mail reported a survey that showed Canadian CEOs are optimistic about economic growth prospects despite the fact they are facing Trump tariffs in the immediate future. That strikes me as a case of groupthink and self-serving denialism. It also looks like a severe case of optimism bias. Optimism bias is when you acknowledge that bad things can happen, but think those bad things will never happen to you. The truth is no one is immune.
Simply put, we can’t have it both ways. Either the Trump tariffs will have modest impact, or they will prove chaotic.
From a macro perspective, political commentators and economists are nearly unanimous that a significant trade war will be massively disruptive. Despite this, our heads of industry are proceeding as though the likely impact will be negligible – and capital markets are yawning at the prospect. This dichotomy calls into question the notion of stock market efficiency.
Markets are widely believed to synthesize all available information quickly and accurately. Even though Trump has said that significant tariffs are coming, the markets have barely flinched. It should also be noted that the economy and capital markets are different things. Still, they are related and the consensus view regarding employment opportunities and inflationary impacts is that they will be harmful and substantial. It seems unlikely that stock markets will emerge unharmed.
Most people have never experienced a meaningful tariff war, which is what Donald Trump is threatening. Indeed, it’s difficult for people to imagine something they haven’t experienced.
Three years ago, Ukrainians watched in bewilderment as Russian soldiers amassed on their border. Even though the military threat was clear, Ukrainians appeared shocked when the attack began; they simply could not believe that their “brothers” would attack them. Similarly, Canadians today cannot fathom their American neighbours starting an unprovoked and mutually harmful trade war. No one in Ukraine or Russia expected this war to last as long as it has.
In Canada today, there is a naïve viewpoint that the threatened tariffs will be modest, selective, and short-lived. This seems highly improbable. It seems more likely that Trump will maintain the tariffs at least until the midterm elections in November, 2026. That would mean there is severe pain on the way and no one is prepared to acknowledge it. Or prepare for it.