By 1930, many companies are beginning to lay off workers. No longer gaining capital from investors purchasing shares of their stock,these companies cannot afford to pay their workers, let alone expandproduction.Consumers won't buy as much if they fear losing their jobs, so even8
people lucky enough to keep their jobs are saving money and not making purchases.As the economy contracts in the U.S., many Americans demand a higher tariffto protect US businesses from cheaper foreignimports.Congress passes the Smoot-Hawley tariff which significantly raises the tax on nearly all imported goods. This produces numerous harmfulunintended consequences:•Because of the tariff, not only do prices of imports rise, often pricesof domestic goods rise in the U.S. as well. People can't afford to buy higher priced goods made in the U.S., so the tarifffails to protect domestic businesses. In fact, most people cannot afford to buy either foreign or domestic goods. Sales continue to slump. Layoffs continue.•Because American consumers buy fewerimported products from Europe (due to the tariff, which has made those goods more expensive), the Europeans have fewerdollars to pay off their debts to the U.S.•Europeans retaliate by slapping tariffs on U.S. products.Retaliatory tariffs hurt U.S. more than Smoot-Hawley helps U.S.businesses.High tariffs may discourage U.S. customers from buying Swiss watches, but the Swiss won't buy U.S. automobiles once the Swiss government imposes a retaliatory tariff on American goods. This is a net loss for the U.S. because not only do the car companies suffer, all the companies that supply products to make cars suffer (windshields, wiring, tires, paint, steel, etc.)•Europeans also retaliate by raising the prices on raw materialsthat the U.S. must import in order to make manufacturedgoods.For example, the prices of rubber and tungsten increase (both 9
needed in making cars).As a result, U.S. products cost more and U.S. customers can't afford to buy them. Demand for products slackens. Production slows. Workers are laid off. Fewer people have money to buy U.S. goods... and the cycle spirals downward.•Because high tariffs keep the Europeans from selling their goods in the U.S., they lose access to dollars. As a result, they have even more difficulty in paying their debts to U.S. lenders.Also, as a result of being shut out of the U.S. market, the European factories produce less, forcing businesses to fire workers (who in turn can't buy as much), and the European economies spiral downward as well.Note the global effectof nationalpolicies. What each nation does negatively affects other nations. High tariffs are key in de-stabilizing and contracting the global economy.ALTERNATIVES TO RAISING THE TARIFF….Instead of raising the tariff, a better solution might have been for the government to increase spending (even if this meant the government going into debt - spending more than it took in).