Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Trump’s Trade Policy is a Recipe for Depression

If it were implemented, one of Donald Trump’s key economic policies would kill millions of jobs, plunge America and the world into depression, and possibly lead to World War III. The policy is a 20% tax (or tariff) that the frontrunner in the Republican presidential contest wants to put on all imported goods, as well as a 45% tariff on Chinese made goods.

The thinking behind Donald’s imbecilic policy is that such a tariff would stimulate job growth because it would make American products more competitive with imports. The problem is that’s not what happened the last time America implemented such a policy when President Herbert Hoover signed the infamous Smoot-Hawley Tariff Act in 1930.

Some economists blame that law for the Great Depression, and others claim it made the Depression worse. Either way, the results were disastrous, two years after the law, unemployment in the U.S. rose by an astronomical 600%, and 24%, or nearly one in four Americans, were out of work. Effects overseas were worse – unemployment rose by 200% in France and Germany, one of the factors that brought Adolf Hitler and the Nazis to power, which laid the groundwork for World War II.


Hoover signed the bill on June 16, 1930, ignoring the warning of 1,028 leading American economists who predicted the bill would lead to economic disaster. Smoot-Hawley raised tariffs on 890 imports, causing other countries to retaliate with trade restrictions of their own, and by 1934, world trade had fallen to 66% of 1929 levels.

How the Trump Tariff could Trigger a Second Great Depression

If Donald were to get elected President and somehow talk Congress into passing his moronic tariff proposal, the result could be worse than Smoot-Hawley. Around 12.7% of America’s gross domestic product (GDP) is generated by exports, according to the International Trade Administration (ITA). Just imagine what will happen if Trump’s Tariff is implemented and other nations such as China retaliated with levies of their own.

What would happen to America if 12.7% of the gross domestic product disappeared overnight? The economy is already in sorry shape, but it could be much worse under the Trump plan. The ITA estimates that 10 million U.S. jobs are directly dependent upon exports, and under the Trump tariff, those jobs could vanish.

Something that Trump seems to ignore is that Smoot-Hawley was not followed by a burst in job creation. Instead, the number of jobs fell dramatically because all the money generated by the exports vanished from the U.S. economy.

Such a scenario could be even more destructive today because America’s most profitable industries, those driving what little recovery there is, are highly dependent on exports. This includes technology, the software industry, the entertainment industry, and the financial services industry. Just imagine what would happen if Alphabet Inc. (the company formerly known as Google), Apple, Microsoft, and Disney’s export dollars were to vanish overnight? The software engineers, data scientists, and investment bankers would join the factory workers at the food pantry.

Hollywood, in particular, is heavily dependent on the international market. Trade papers like The Hollywood Reporter now report the international weekend box office because foreign releases are critical to filmmakers’ profits. Without worldwide release, the studios would quickly collapse.


The devastation would extend far beyond Silicon Valley and Hollywood; for example, tourists could stop coming to Orlando and Las Vegas. Exports of cars and machine tools from the Midwest could dry up. In Nevada, Elon Musk’s Giga Factory and Faraday Future’s electric car factory plans would grind to halt. Instead of thousands of new jobs, there would be nothing but empty buildings in the desert. The carnage in the financial industry could also be terrible – over 5,000 banks collapsed in the two years after Smooth-Hawley was signed.

Hitting the Average Family in the Pocket Book

Another obvious side effect of the tariff that Trump does not seem to see or care about is the way in which it will reduce average Americans’ standard of living. A 20% tariff will mean an almost instant price increase on a wide variety of products that average Americans buy, such as clothing.

That means some families’ incomes will be reduced by 20%, and others simply will not be able to afford clothing or shoes. Many people will have less money in their pockets, which will mean less spending at retailers, forcing them to close stores and lay off workers and making the retail apocalypse worse. It will also mean lower sales taxes in many communities, which will force governments to cut services and lay off workers.

Many families are already suffering terribly because of income inequality. Around one in seven U.S. households relied on a food bank to stave off hunger in 2014, according to USA Today. If the cost of living were to go up 20%, that number could rise to one in four.


The effects could be worse because Trump favors a 45% tariff on Chinese goods. Since China could soon surpass Canada as America’s largest trading partner, that means the prices of a large percentage of the goods Americans buy would increase by 45%. Could anybody besides a billionaire like the Donald afford that?

The result, as in 1930, would be less economic activity and a dramatically higher cost of living for average Americans. It could also lead to a complete financial meltdown and cause all economic activity to grind to a halt.

Laying the Groundwork for War

The final, and perhaps most terrifying, side effect of Trump’s trade policy could be war. Some economists blame Smoot-Hawley for the conditions that brought Hitler to power in Germany.

Something similar happened in Japan, another export dependent nation where economic turmoil brought radical militarists to power in the 1930s. The militarists launched a wave of conquests that eventually led to an all-out war between Japan and other countries, including the United States.

Today, China’s economy, for example, is on very shaky ground and heavily dependent on exports to the U.S. Even a small drop in U.S. trade could lead to economic collapse and political turmoil in the People’s Republic. History teaches us that such turmoil produces radical leaders like Hitler, who are prone to launch wars to solve the nation’s problems.

Nor is it just China. Other export dependent nations, such as Russia and Saudi Arabia, are in terrible shape because of the collapse in oil prices. Some of those countries have powerful militaries and even nuclear weapons. Do we want a nuclear armed Hitler, possibly with a robot army, at his command?

Back to Herbert Hoover’s America

One of the rationales behind Donald Trump’s presidential fantasy is that Trump and his tariff could somehow take America back to what it had been under Dwight D. Eisenhower in the 1950s, with lots of jobs, a high standard of living, and a large middle class. Unfortunately, history shows us that Trump’s policies would take us back to Herbert Hoover’s America, with Depression, breadlines, mass unemployment, and the shadow of world war on the horizon.


What’s truly frightening is that Trump is not the only one pushing such policies. The Democratic front runner and winner of the New Hampshire primary, U.S. Senator Bernie Sanders (I-Vermont), has similar views on trade. Sanders has not made anything as explicit as Trump’s tariff promise, but his public statements indicate he would be open to such a policy.

The biggest threats to our economy, our nation’s future, and our families’ pocketbooks could be the fools running for President. Hopefully, common sense will prevail at the ballot box before we face policies that could trigger a second Great Depression and World War III.