Misallocation and productivity effects of the Smoot-Hawley tariff

Using a newly created microeconomic archive of US imports at the tariff line level for 1930-1933, we construct industry-level tariff wedges incorporating the input-output structure of US economy and the heterogeneous role of imports across sectors of the economy. We use these wedges to show that the average tariff rate of 46% in 1933 substantially understated the true impact of the Smoot-Hawley (SH) tariff structure, which we estimate to be equivalent to a uniform tariff rate of 70%. We use these wedges to. calculate the impact of the Smoot-Hawley tariffs on total factor productivity and welfare. In our benchmark parameterization, we find that tariff protection reduced TFP by 1.2% relative to free trade prior to the Smoot-Hawley legislation. TFP fell by an additional 0.5% between 1930 and 1933 due to Smoot-Hawley. We also conduct counterfactual policy exercises and examine the sensitivity of our results to changes in the elasticity of substitution and the import share. A doubling of the substitution elasticities yields a TFP decline of almost 5% relative to free trade, with an additional reduction due to SH of 0.4%. (C) 2012 Elsevier Inc. All rights reserved.