Trump, Trade Wars & The Depression

Historical precedent, tariffs and historic trade flows

In honour of President Trump’s ‘Liberation Day’, which marks the imposition of widespread tariffs, I thought it would be interesting to explore the historic conditions surrounding the Smoot-Hawley tariffs being imposed in 1930 and what the landscape of global trade looked like at the time, contrasting that with the present.

In 1928, the last full year not impacted by the Great Depression, the United States had the largest nominal trade surplus on the planet. The trade surplus equalled 1.4% of U.S GDP at the time, which roughly translated into today’s terms would equal a surplus of roughly $420 billion a year.

According to figures from the U.S Bureau Of Economic Analysis (BEA), in the 2024 calendar year, the U.S has a trade deficit of $1.21 trillion.

But there is more to it than just the headline trade balance, the levels of trade across the different classes of goods varied dramatically.

When it came to food, raw materials and semi-finished goods which made up 52.9% of goods exports in 1929, the U.S had a trade deficit. On the other hand when it came to manufactured goods which made up the remaining goods exports, the U.S had a trade surplus of 1.49% of GDP.

In short, the U.S was heavily reliant on net exports of manufactured goods to keep its economy humming along. Amidst the escalating tit for tat in trade barriers, as well as some of the United States most vital trading partners devaluing their currency’s, this reliance on exports of manufactured goods left the U.S highly vulnerable.

While all major economy’s would see the output of their manufacturing sector hit hard, the U.S was in a completely different league to most.

If we use Britain as our case study, manufacturing output contracted by approximately 25.7% and would recover to its pre-Great Depression peak by 1935. For the United States, manufacturing output would contract by 50.9% and while output would recover to pre-Great Depression levels during 1937, it did not sustainably recover until after the start of World War 2 in Europe.

As demand for manufactured goods fell in all advanced economy’s at the time, this fed through domestic economy’s hitting employment and consumer spending, which helped to drive an even greater reduction in manufacturing output.

But for the U.S, which held the largest trade surplus of manufactured goods in the world and what would become the largest degree of excess capacity, the feedback loop was particularly damaging and that damage long lived.

Looking at the history, its swiftly clear that the economy of America in the 1930s sounds nothing like the modern day United States, it far more closely resembles another of today’s major global economy’s, China’s.

China

In order to put the relative manufacturing trade surplus of the U.S in 1929 and China in 2023 in perspective, we will be using manufacturing trade surplus as a percentage of global GDP as a metric.

Based on the average estimate of global GDP in 1929, the U.S manufacturing trade surplus amounted to approximately 0.44% of global GDP.

In 2023, Michael Weilandt, Volkmar Baur and Brad Setser authored a paper for the Council on Foreign Relations. In it, they concluded that as of 2023, China’s manufacturing trade surplus came to around 1.7% of global GDP.

When looking at the other major categories of trade such as raw materials and food, China like the 1929 United States once again has a trade deficit in those avenues.

Based on levels of manufacturing capacity relative to net domestic demand in a vacuum, China is more exposed to a broad based trade war than the United States was when the Smoot-Hawley tariffs were imposed in 1930.

The Other Side Of The Coin

Recently the Twitter account for research firm Variant Perception made the case that “Demand was America’s key export”.

Looking at the other side of the issue in the Weilandt, Baur and Setser analysis, the United States has the largest manufacturing trade deficit in the world, accounting for roughly 1.3% of global GDP.

When looking at the relative balance on a chart, it’s immediately clear how the United States is effectively Ying to China’s Yang, two sides of the same coin.

Source: Council On Foreign Relations

While this dramatically different status quo to the first half of the 20th century has left the U.S highly exposed to a breakdown of global trade and global supply chains, it also leaves China and other manufacturing trade surplus countries reliant on the U.S market.

The Take Away

Ideas of European and Chinese manufactured goods en masse finding other export markets to avoid U.S tariffs are more or less a fantasy. For better or worse the U.S economy is the centre of the global consumer economy and all three of the next largest economy’s in the world (China, Japan, Germany) run large manufacturing trade deficits, which are ultimately heavily absorbed in net terms by the U.S.

Today global trade flows of manufactured goods are even more unbalanced than they were in 1930 when a combination of the Smoot-Hawley tariffs, the Great Depression and rising protectionism delivered the U.S economy one of the most sizable economic hits in its history.

Ultimately, the big issue is arguably what happens with U.S tariff rates on Chinese goods and how the knock on effects of that evolves, as Chinese manufacturers attempt to find other markets for their wares, largely in advanced economy’s with sizable manufacturing sectors of their own to protect.

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