Lesson No.

International Economics: Theory and Policy

by Flt Lt Iftikhar Ahmed

LESSON NO. 03

The Great Depression, Smoot-Hawley,

and the Reciprocal Trade

Agreements Act (RTAA)

International Trade By : Flt Lt Iftikhar Ahmed 2

Understanding Tariffs

LEARNING OBJECTIVES 1. Understand the trade policy effects of the

Great Depression.

International Trade By : Flt Lt Iftikhar Ahmed 3

Great Depression

Perhaps the greatest historical motivator for trade liberalization since World War II was the experience of the Great Depression.

Began with the crash of the U.S. stock market in late 1929

The world economy began to shrink at an alarming pace

(The U.S. economy shrank by 8.6 % and the unemployment rate rose to 8.9 %)

International Trade By : Flt Lt Iftikhar Ahmed 4

Tariffs raised to protect domestic industry so that U.S. jobs could be saved in the import-competing industries

Many economists disagreed with the proposition

In May 1930, 1,028 economists signed a petition protesting the tariff act and beseeched President Hoover to veto the bill

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Smoot-Hawley Tariff Act

Smoot-Hawley Tariff Act (Tariff Act of 1930), which raised average tariffs to as much as 60%, was passed into law

Foreign companies responded to the Smoot-Hawley tariffs with higher tariffs of their own in retaliation.

Dramatic drop in international trade flows throughout the world deepening economic crisis

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Reciprocal Trade Agreements Act (RTAA)

The Depression did get much worse. The U.S. economy continued to contract at double-digit rates for several more years, and the unemployment rate peaked in 1933 at 24.9 %.

Franklin Roosevelt spoke against the high tariffs

U.S. Congress, passed the Reciprocal Trade Agreements Act (RTAA)

International Trade By : Flt Lt Iftikhar Ahmed 7

Reciprocal Trade Agreements Act (RTAA)

The RTAA authorized the U.S. president to negotiate bilateral tariff reduction agreements with other countries

the president could send his agents to another country for tariff reduction agreements

Over sixty bilateral deals were negotiated under the RTAA

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Trade-weighted Average Tariff

The RTAA is significant for two reasonsi. U.S. Congress granted trade policymaking

authority directly to the presidentii. the RTAA served as a model for the

negotiating framework of the General Agreement on Tariffs andTrade (GATT)