Question

How did the Smoot-Hawley Tariff of 1930 (a) reduce aggregate demand, and (b) create a negative real shock? Explain your answer.

Answer 1

The Smoot-Hawley Act is the Tariff Act of US,in1930.through this act implimented increased 900 import tariffs by an average of 40% to 48%.Due to this millions of Americans had just lost everything like job,business with the stock market crash.Besides this canada,europe,australia and asian countries have lost their one third of the farm exports. The Smoot-Hawley Act is the Tariff Act described the protectionism in trade,which means making barriers on trade. it can shift supply if cut off foreign competition, domestic companies will benefit the return and save their previous share.However it will also rise prices with less competitors so that can reduce the aggregate demand.Moreover,oftenly protectionism shows a reciprocal action if different market sitation, that pushes demand down.Smoot-Hawley proved,trade protectionism is how much dangerous for the global economy. So that from that period most world leaders suggest free trade agreements that promote increased trade for whole world and help economic sustainable development.

While implimented The Smoot-Hawley Act is the Tariff Act in US there is no appropriate monetary or fiscal policy. Through this act US limit the import by imposing high tariff.This will negatively affect the export and import especially this come on active at 1930 depression time ie; there is prevailing condition like low consumption,low produtction and low investment. so that this become reason of worsoning the situation.However some studies shows that this is only affect the international trade badly.This help to increase the GDP of US than previous period.

Todays this act become part of economic discussion, because of Trump bring back protectionism as part of his campaign to increase U.S. jobs,immediately withdrew from the Trans-Pacific Partnership, the biggest trade agreement since the North American Free Trade Agreement and he renegotiated NAFTA with Mexico and Canada.Moreover Trump initiated a trade war by announcing a 25% tariff on steel. Protectionism would have an even more devastating effect in modern times than it did in 1929. Exports now comprise 13% of U.S. GDP. more suffering industries areThe United States exports a lot of oil, commercial aircraft, food, and automobiles due to this tariff act.To conclude,with these negative impact of trade protectionism most of the economist stay againt this.