Given the global market carnage born of Trump’s tariffs, you are going to start reading a lot of articles about how today parallel’s the 1930’s, otherwise known as the “Great Depression” era.
In 1930, the USA passed the Smoot-Hawley Tariff Act that significantly increased import duties with the primary goal of protecting American farmers and businesses from foreign competition. The average tariffs increases were around 20%, with some items seeing hikes of 40 to 60%.
Sound familiar?
Well, the 1930’s tariffs had triggered retaliatory tariffs imposed by over 25 countries that spiralled events out of control.
Still sound familiar?
This all lead to a precipitous decline in international trade by approximately 60% between 1929 and 1934, a steep decline in industrial production around the world, mass unemployment, widespread credit and banking panic and, ultimately, the Great Depression.
At least, this is what you are going to read about a lot in the coming days and/or weeks.
While there is merit in analysing history and understanding it, the world of the 1930’s is quite different from today’s world and, thus, the outcome of what Trump has triggered may differ somewhat.
For example, in the 1930’s, the USA’s economy was dominated by agriculture and manufacturing while today the manufacturing has vanished and been replaced by technology, healthcare and financial services.
In the 1930’s, the world hammering the USA back with tariffs meant that all the goods they imported from the USA manufacturing giant rose in price at home. That is no longer particularly true.
Indeed, the world’s goods are now largely produced in Asia, or predominantly China, so the structure and direction of international trade has changed dramatically.
Furthermore, in the 1930’s China’s economy was very small while today China’s economy is the second largest in the world. Once again, this is a significant difference, particularly if most of the tariffs and counter-tariffs are directionally USA-centric and not from other non-USA countries to other non-USA countries.
Other significant differences are the existence of a global technology sector and the Internet, both of whom did not exist in the 1930s global economy.
Finally, the Great Depression technically started in late 1929. By the time the Smoot-Hawley Tariff Act was enacted, the USA (and global economy) was already fragile and in recession. This is opposed to today, where the post-COVID recovery has been pretty broadly strong and, even the weak parts of the global economy, are arguably not in recession right now.
As the general media begin to whip up clickbait articles about how today is like the start of the Great Depression, I thought I’d get ahead of the journalists and highlight how things are quite different this time around too.
This doesn’t mean that this ends well. No one wins in trade wars. But what do today’s differences from 1930 mean and how does it imply that this time things will play out differently?
No one knows but I will leave you with a quote from Mark Twain: “History Doesn’t Repeat Itself, but It Often Rhymes”.
ORIGINALLY PUBLISHED ON MONEYWEB.