The Ghosts of Smoot-Hawley in a Semiconductor Shortage
In June 1930, President Herbert Hoover signed the Smoot-Hawley Tariff Act despite a petition from 1,028 economists warning against it. The legislation raised tariffs on over 20,000 imported goods to protect American industries during the early stages of what would become the Great Depression. Within two years, international trade had collapsed by nearly 40 percent as other nations retaliated with their own protective barriers. The parallels to our current moment are striking, but they’re also deceptive in ways that show just how much more complex trade policy has become.
Today’s trade disputes aren’t just about protecting domestic jobs or industries. They’re about technological sovereignty, supply chain resilience, and national security—concepts that would have been foreign to policymakers in 1930. When the Biden administration maintains Trump-era tariffs on Chinese goods while simultaneously launching industrial policy initiatives like the CHIPS Act, we’re witnessing something fundamentally different from classical trade protectionism. The question is whether these policies represent a necessary evolution of economic statecraft or a dangerous drift toward the kind of economic nationalism that proved so destructive in the past.
The semiconductor shortage that began in 2020 offers a perfect case study in this complexity. Unlike the agricultural and manufacturing goods that dominated trade discussions in the 1930s, semiconductors are both a consumer product and a foundation of national defense capabilities. When Taiwan Semiconductor Manufacturing Company suspended operations due to COVID-19 lockdowns, it didn’t simply disrupt auto production in Detroit. It threatened the Pentagon’s ability to maintain its weapons systems and raised uncomfortable questions about America’s dependence on a supplier located 90 miles from mainland China.
The Security Dilemma Meets the Efficiency Imperative
The fundamental tension in contemporary trade policy lies between two competing logics that previous generations of policymakers rarely had to reconcile simultaneously. The first is the economic logic of comparative advantage and global supply chains that has driven trade liberalization since the 1970s. The second is the security logic that views economic interdependence as a potential vulnerability rather than a source of mutual prosperity. This tension becomes particularly intense when dealing with strategic competitors like China, where normal commercial relationships exist alongside broader geopolitical rivalry.
Consider the evolution of thinking around rare earth minerals. These elements, crucial for everything from wind turbines to guided missiles, were barely on the radar of trade negotiators until China demonstrated its willingness to restrict exports during a diplomatic dispute with Japan in 2010. Suddenly, what had been a routine matter of sourcing materials according to cost and quality became a question of national vulnerability. The Obama administration began exploring domestic rare earth production, the Trump administration included rare earths in its trade war calculations, and the Biden administration has made supply chain resilience a centerpiece of its economic strategy.
The challenge is that security considerations often point toward policies that economists would consider inefficient. Maintaining redundant supply chains costs more than relying on the single most efficient producer. Building domestic semiconductor fabrication capacity means accepting higher costs for chips that could be produced more cheaply overseas. These aren’t the kind of clear-cut efficiency gains that made the case for trade liberalization so compelling in previous decades.
What makes this particularly complex is that the security benefits are largely hypothetical and long-term, while the economic costs are immediate and measurable. American consumers pay higher prices for goods subject to tariffs today, while the benefits of reduced dependence on potentially unreliable suppliers may never materialize if geopolitical tensions remain manageable. This imbalance between visible costs and invisible benefits creates a persistent challenge for democratic governance of trade policy.
The Institutional Architecture of Economic Competition
The international trade system that emerged after World War II was built around the assumption that economic integration would reduce the likelihood of conflict between major powers. The General Agreement on Tariffs and Trade, later the World Trade Organization, created mechanisms for resolving disputes peacefully and gradually reducing barriers to commerce. This system worked remarkably well for several decades, facilitating unprecedented global economic growth and helping to integrate former adversaries like Japan and Germany into the Western economic order.
However, this institutional framework wasn’t designed to handle a situation where one of the world’s largest economies operates according to fundamentally different principles regarding the relationship between state and market. China’s state capitalism model, with its combination of market mechanisms and strategic government intervention, challenges the assumptions that underlie the liberal trade order. When Chinese companies receive subsidies that would be illegal under WTO rules, or when technology transfer becomes a condition for market access, the traditional tools of trade governance prove inadequate.
The result has been a gradual erosion of faith in multilateral trade institutions and a turn toward bilateral negotiations, economic sanctions, and unilateral industrial policy. The United States-Mexico-Canada Agreement replaced NAFTA with more explicit provisions about labor standards and technology transfer. The Comprehensive and Progressive Trans-Pacific Partnership proceeded without American participation. The WTO’s dispute resolution mechanism has been effectively paralyzed by American objections to its appellate process.
Perhaps most significantly, there has been a revival of industrial policy as a legitimate tool of economic statecraft. The CHIPS Act, the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act all include provisions designed to build American manufacturing capacity in strategic industries. This is a significant departure from the Washington Consensus that dominated policy thinking for three decades, but it also reflects a bipartisan recognition that pure market mechanisms may be insufficient to address the challenges of strategic competition.
The Democratic Challenge of Long-Term Thinking
One of the most underappreciated aspects of contemporary trade policy is how it tests the capacity of democratic systems to make decisions that impose short-term costs for long-term benefits. Building supply chain resilience requires sustained investment over multiple electoral cycles, but the benefits may not become apparent until a crisis that may never come. This creates a persistent temptation to defer difficult decisions or to pursue policies that offer immediate political benefits regardless of their long-term consequences.
The politics of trade have become particularly complex because the costs and benefits are distributed so unevenly across different constituencies. Tariffs on steel imports may protect jobs in Pennsylvania steel towns, but they increase costs for manufacturers in other states who use steel as an input. Subsidies for semiconductor manufacturing may enhance national security, but they also represent a significant expenditure of taxpayer funds with uncertain returns. These trade-offs are difficult to manage in any political system, but they’re especially challenging in a democracy where elected officials face regular accountability to voters who may not share their time horizons.
The experience of recent years suggests that successful trade policy requires not just technical expertise, but also the political skill to build coalitions that can sustain long-term strategies. This may explain why some of the most significant trade policy initiatives of the past decade have enjoyed bipartisan support. The CHIPS Act passed with substantial Republican backing despite partisan divisions on most other issues, reflecting a recognition that technological competition with China transcends normal political boundaries.
Yet even bipartisan consensus can be fragile when the costs of policy become visible before the benefits are realized. The challenge for democratic governance is maintaining support for strategies that may take years or even decades to demonstrate their value, especially when those strategies require significant sacrifices in terms of economic efficiency or consumer welfare.
Learning from History Without Being Trapped by It
The lesson of the 1930s isn’t that all departures from free trade lead inevitably to economic catastrophe and international conflict. Rather, it’s that trade policy can’t be separated from broader questions of international order and domestic political stability. The Smoot-Hawley tariffs were destructive not simply because they reduced economic efficiency, but because they contributed to a breakdown of international cooperation at a moment when such cooperation was essential to address shared challenges.
Today’s trade policies face a similar test. The question isn’t whether measures to reduce dependence on strategic competitors or build domestic manufacturing capacity are justified in isolation, but whether they contribute to a stable international order that can manage competition without sliding into conflict. This requires not just sound economics, but also diplomatic skill, alliance management, and a clear understanding of how economic tools aid broader strategic objectives.
The path forward likely requires accepting that the era of pure trade liberalization is over, while also recognizing that the alternatives must be carefully designed to avoid the mistakes of the past. This means building supply chain resilience through diversification rather than pure reshoring, maintaining alliance relationships that share the costs of strategic competition, and preserving space for cooperation even with competitors in areas of mutual interest.
As we navigate this transition, the fundamental question remains whether democratic societies can develop the institutional capacity to think strategically about economic policy over time horizons that extend beyond electoral cycles. The answer to that question may determine not just the future of international trade, but the broader trajectory of the international system in an era of renewed great power competition.