HS decomposition, 9/15/2005, 7:25:40 PM
1
The Smoot-Hawley Tariff and Crisis in Cuba
Alan Dye
Barnard College, Columbia University
Paper prepared for the ISNIE 2005 Conference
Barcelona, Spain, September 22-24
Please do not cite without author’s permission.
A wave of criticism in the early 1930s indicted the Smoot-Hawley tariff and
linked it to the international crisis. Many considered it responsible for the poisoning of
international trade relations and the plummeting of trade levels worldwide. Contemporary
critics in the United States argued that the tariff was a major factor in the severity of the
depression, but recent studies have moved away from this indictment. Criticisms abroad
were even more widespread. Joseph Jones motivates his 1934 study of the wave of trade
retaliation by observing that no other peacetime legislative act of the United States had
ever evoked such a “violent foreign reaction.” Although thirty-three countries made
official protests, Jones says the formal declarations were insignificant compared to the
“general protest and indignation … outraged press, mass meetings, and resolutions of
trade industrial and labor organizations” in the major trading nations of the world (p. 1).
Although accepted views tend to accept Eichengreen’s dismissal of SmootHawley as a cause of the depression in the United States, Eichengreen himself defends
contemporary indictments of the U.S. tariff as a cause of the international breakdown and
an element of the U.S. failure to provide economic leadership in a time of international
crisis (1989, p. 34). This broader point is prompted by Kindleberger’s (1973) analysis,
who argues that the international crisis was “so deep and long” because the United States
did not to provide hegemonic leadership, in particular, to maintain open import markets
to alleviate international distress on commodities and to provide countercyclical lending
and discounting to avoid the breakdowns of the international financial and monetary
systems (p. 292). Jones offers a similar logic in his study as he explains why the tariff
was received so badly in Europe. Besides contributing to the crisis, it weakened European
HS decomposition, 9/15/2005, 7:25:40 PM
2
countries’ abilities to repay their war debts. It infuriated political leaders who found it
inconsistent with the U.S. policy of resistance toward renegotiating the debt (1934 p. _).
Though the literature emphasizes the relations with European countries, strains in
the western hemisphere were similar. The share of U.S. capital going to Latin American
countries to fuel export-led growth had grown significantly since the First World War.
With the onset of the crises in international commodity markets in the late twenties,
export revenues fell and credit became important for servicing existing debts (Cortes
Conde 1992). The shock to credit access after 1929 imposed serious fiscal burdens. In the
fallout, many Latin American countries fell into political instability. By one count, there
were seventeen political revolutions between 1929 and 1933 (Véliz 1980, p. 279). The
tariff provoked antagonism and official protests, and fueled popular movements against
U.S. imperialism. Even before the general associations between the U.S. tariff and the
downward spiraling of international trade, Latin Americans had become bitter about it.
They saw in the prolonged debates in Congress from December 1928 to June 1930 an
alarming indifference in Congress to enact a policy that would certainly do harm to Latin
American countries, adding to local export crises and inducing greater misery and
political instability. Yet, unlike Canada, Latin American countries were often not in a
position to retaliate. Their export demands often were too small, the economies were too
export-dependent, and as events progressed, leaders were overwhelmed by political
disorder and insurgency.
This paper examines the effect of the Smoot-Hawley tariff on Cuba, with two
main objectives. First, it offers a quantitative estimate of the immediate or short-run
effect of the tariff. The main challenge to this first task is to disentangle the effect of the
tariff from the general effects of the depression. No valid causal statement can be made
about the effect of the Smoot-Hawley tariff on the crisis in Cuba without estimating the
effect of the international crisis on Cuba in the absence of the tariff. I use counterfactual
analysis to separate the effects of falling incomes, caused by the international depression,
and the effects of the increased tariff on sugar, which was effectively the only channel
through which Smoot-Hawley impacted Cuba. Unlike accepted views of its effect on the
U.S. economy, I find that the tariff explains a large part of the effect of the crisis in Cuba.
My estimate puts it at approximately one-third of the contraction of Cuban national
HS decomposition, 9/15/2005, 7:25:40 PM
3
income. Though anyone familiar with the structure of the Cuban economy would expect a
large effect, this is perhaps more than expected. However, one observes that domestic
sugar interests were able to discriminate against Cuban imports export the transfer burden
of crop reductions abroad, they had excellent comparative cost data from which to
accomplish it, and the increase in the effective rate of protection for sugar was extreme.
Second, the paper presents a counterfactual quantitative analysis that indicates the
extent to which the effect of the 1930 tariff on Cuba was persistent. I show that the effect
endured well beyond the years of crisis because its effects became embedded in the
institutions of sugar controls that governed U.S. sugar production and imports since 1934.
This argument fits into a broader literature of institutional change that traces a significant
core of the institutional underpinning of U.S. trade policy in the 20th century and the cold
war with Cuba to the Smoot-Hawley tariff.
The paper is organized in five sections. The first section gives background
essential for the analysis. The next three sections present my analysis of the immediate
effects of the tariff of 1930 on Cuba. The second section sets up the relevant
counterfactual in the U.S. sugar market. The third section examines how the impact is
allocated between domestic and foreign producers. The fourth section estimates the effect
of the sugar industry on Cuban aggregates. The fifth section explains why the initial
effect was persistent and presents a counterfactual estimate of its magnitude.
1. Background
In many respects, Cuba’s situation was unlike other Latin American countries.
For one thing, Cuba was, next to Mexico, the second most important Latin American
consumer of U.S. exports. More than just an important buyer, the Cuban economy was
more tightly integrated than any other country in the immediate sphere of U.S. influence.
Until 1932, Cuban currency was fixed at a one-to-one ratio with the U.S. dollar; and U.S.
currency circulated alongside the peso (Wallich 1960). Seventy-five percent of Cuba’s
banking sector consisted of branches of large North American banks. Most large firms
had connections in the United States. Economic crisis in Cuba in 1921-1922 and after
1926 had resulted in bankruptcies and takeover of many of these companies by their
HS decomposition, 9/15/2005, 7:25:40 PM
4
North American banks. By 1929, for example, in the predominant sugar industry, North
American companies owned or controlled about 70 percent of the production capacity.
Another distinctive characteristic was its extreme lack of industrial
diversification. Sugar dominated the economy like in no other country. Over the 1920s,
sugar production ranged between 4 and 5.3 million metric tons per year. Estimates place
that level of production at between 36 and 48 percent of aggregate production. Only 0.2
to 0.3 million tons of sugar annually was consumed domestically; the rest was exported.
Cuba’s economy was open, with a ratio of exports to national income above 50 percent;
but it was mostly sugar. Sugar represented between 80 and 92 percent of total exports.
The destination of exports was also highly undiversified. Depending on the year, the
sugar exports going to the United States ranged between 74 and 90 percent of all sugar
exports. Another 7 to 20 percent went to the UK. This meant that Cuba was seriously
exposed to the political risk of tariff revisions in the United States. Cuban sugar exports
to the United States in the 1920s are estimated to range from 29 to an extraordinary 56
percent Cuban national income! 1
Studies show also that Cuba’s lifeblood, sugar, was the commodity most affected
by Smoot-Hawley. Archibald and Feldman (2000) estimate the change in effective rates
of protection (ERP) relative to the previous Fordney-McCumber tariff of 1922. They find
that, by this measure, only 14 out of 41 tariff schedules (classified by industrial sector)
received ERP gains that exceeded 10 percent. Except for two, none exceeded 50 percent.
The two exceptions were Schedule 9, butter, cheese, etc., and Schedule 5, sugar. They
estimate the increase in ERP for the former to be 397.9 percent and for sugar to be a
remarkable 1145.5 percent (p. 1224; see also Hayford and Pasurka 1991). Our knowledge
of the political economy of these sectors is consistent with the rank ordering these
estimates give. McDonald, O’Brien and Callahan (1997) find that the abandonment of the
Canadian Liberal Party by dairy constituents in Quebec partially explains the electoral
victory in 1930 of the Conservative Party, which campaigned on the issue of protection
1
Data on sugar production and values are from Moreno Fraginals (1978), vol. 3, and Zanetti Lecuona
(1987). See also Álvarez Díaz (1963). Estimates of national income are from Alienes Urosa (1950) and
Santamaría García (2001).
HS decomposition, 9/15/2005, 7:25:40 PM
5
and independence from U.S. trade. Critics of Smoot-Hawley in the United States said
their reaction was understandable.
Still, the New York Times (1/17/1930) wrote that the sugar schedule was the most
controversial schedule of the bill. The reasons have been discussed elsewhere. 2 I
summarize them here because they establish the basis for the most plausible
counterfactual. The tariff question was predominantly a partisan issue. However, an
explosive debate over the composition of the tariff increase split the majority party.
Progressive Republicans from the Midwestern and western states demanded tariff
increases for agricultural products only, as agricultural relief; but the Republican party
leadership logrolled and raised tariffs across the board. After the bill was passed in the
House and reported to the Senate, progressive Republicans coalesced with the Democrats
to try to reduce all non-agricultural tariff increases provided in the bill (costs to farmers)
to their 1922 levels. Counterintuitively, sugar was classified in this battle as an industrial
product. The Democrat/progressive-Republican coalition opposed the increase in the
sugar tariff because it increased costs to consumers, including farmers, but benefited only
1 percent of farmers as growers of sugar beet or cane. Yet domestic sugar processors
stood to gain much, and they were well-represented in the Senate, where all states had
equal representation. Beet-sugar processors were important constituents in nineteen
western and Midwestern states, and cane-sugar processors were important in two
southern states. Sugar refiners, on the other hand, who were the main buyers of imported
raw cane sugar, were not well-represented in the Senate, concentrated only in a handful
of east coast states.
The battle in the Senate reached a climax in January of 1930 over the sugar tariff.
Despite the strong representation of domestic sugar processors, the opposition coalition
succeeded in passing an amendment that lowered the sugar tariff, restoring it to its 1922
level. The victory was only temporary, however, as Reed Smoot, who had both personal
2
For a number of reasons, strong partisan issues that had earlier caused a split in the Republican Party over
the tariff converged ultimately into an acrimonious clash over the sugar tariff. A coalition of Democrats and
insurgent progressive Republicans almost held the sugar tariff at its 1922 status quo. The domestic sugar
industry emerged victorious Senator Reed Smoot of Utah, who had constituent as well as personal
connections to the Utah-Idaho beet sugar industry, exercised his powers as a member of the Republican
Party leadership and chair of the Senate Committee on Finance (Dye and Sicotte 2005b; Irwin and
Kroszner 1996).
HS decomposition, 9/15/2005, 7:25:40 PM
6
and constituent interests in the Utah beet-sugar industry, organized a controversial and
much maligned log roll to reinsert an increase of the sugar tariff into the bill; then, later,
he used his leverage as party leader and chair of the Senate Finance Committee, which
had jurisdiction over the bill, to enforce the log roll in the conference committee. The
result was an increase from the 1922 full sugar duty from 2.206 cents to 2.5 cents per lb.
(Dye and Sicotte 2005b; Irwin and Kroszner 1994; Callahan, O’Brien and McDonald
1994; Eichengreen 1989; Kaplan 1996; Ballinger 1971).
Finally, it was well known that setting the tariff on sugar was almost equivalent to
setting the U.S. trade policy toward Cuba. The only sugar imports subject to the sugar
tariff came from Cuba. Table 1 shows the regional distribution of supplies in the U.S.
sugar market. Offshore sugar from the U.S. insular possessions, Hawaii, Puerto Rico and
the Philippines, enjoyed duty-free status. Imports of sugar from other foreign sources into
the United States were negligible because in a trade reciprocity treaty of 1903, Cuba had
received a preferential 20 percent discount on its exports of sugar and tobacco into the
U.S. in exchange for preferential tariffs on U.S. exports into Cuba. The treaty was
intended to stimulate the recovery of the Cuban economy after a devastating war of
independence in 1895-1898. By 1909, expansion of the Cuban sugar industry had
progressed until its production levels exceeded its exports to the U.S. market. It enjoyed
both a preferential discount and ideal natural conditions for cane sugar, which together
gave it sufficient cost advantages to prohibit other foreign suppliers from the U.S. market.
2. Price and Volume Effects in the Sugar Market
The Smoot-Hawley tariff went into effect on June 18, 1930, after eighteen months
of controversy and debate in Congress. Over the next two years, U.S. trade collapsed.
The real value of imports and exports in the U.S. each fell by about 40 percent between
1930 and 1932 (Irwin 1998a). U.S. imports from Cuba fell by 60 percent. The real value
of Cuba’s exports to the rest of the world meanwhile fell by 47 percent, but they
accounted only for 23 percent of the country’s total exports. Estimates of Cuba’s national
income are in general agreement about the pattern and magnitude of fluctuation during
the crisis years. From 1929 to 1932, Alienes’ estimate shows a 38 percent decline,
HS decomposition, 9/15/2005, 7:25:40 PM
7
whereas Santamaría estimates a 31 percent decline.3 To compare, the U.S. GNP fell by
about 30 percent over the same period (Irwin 1998b).
Figure 1 shows that total exports and sugar exports plummeted in unison
beginning in 1929. Table 2 gives further details of the movements of the two related
quantities from 1929 to 1932. The table divides exports into three sectors – sugar,
tobacco, and other, and for sugar exports, it distinguishes between U.S. and non-U.S
destinations. The upper panel gives exports in millions of real U.S. dollars (1926=100)
and their percent change from 1929 to 1932. Export revenues are shown to have fallen by
59.6 percent, and sugar export revenues to have fallen by 63.8 percent. Table 3 presents a
growth accounting decomposition, which breaks up the percent change of total exports
shown in Table 2 into sectoral contributions, reported in both absolute and percentage
contributions to the 55.2 loss of export revenue. It shows that 81.5 percent of the loss of
export revenues (48.6 out of 59.6 percentage points) came from losses in the sugar sector,
and 70.1 percent (41.8 percentage points) came from losses of sugar exports to the U.S.
market alone.
To ascribe a causal connection between the Smoot-Hawley tariff and the crisis in
Cuba requires disentangling the contractionary effect of the tariff act from other sources
of contraction caused by the depression. Irwin’s (1998a) study that quantifies the sources
of decline in U.S. imports highlights three effects to be distinguished and separated. First,
demand for imports could fall from either increased tariffs or fallen incomes. In addition,
most duties at that time were specific, which made ad valorem equivalent tariff rates
dependent on the price level. Irwin finds that Smoot-Hawley raised the average ad
valorem tariff rate by 20 percent or less, assuming no price effect. Accounting for falling
prices after 1930 pushes ad valorem rates up an additional 30 percent or more (Irwin
1998a, p. 336, 1998b; Crucini and Kahn 1996).4 He notes that it is incorrect to attribute
the post-1930 price effect on ad valorem rates to the Smoot-Hawley act, since the
preponderance of specific duties in U.S. tariff schedules predated the act. If
3
The estimates cited are from Julian Alienes Urosa (1950) and Santamaría García (1999). Comparison of
other estimates are found in Santamaría García (2001), p. 405. Series are deflated in Cuban constant prices
of 1926 using price index constructed by Antonio Santamaría.
4
Estimates vary because there is no single way to calculate average tariff rates. For discussion, see Irwin
1998b.
HS decomposition, 9/15/2005, 7:25:40 PM
8
counterfactually Smoot-Hawley had not occurred, the increase in ad valorem rates caused
by the deflation would have happened anyway. Disentangling the three sources – the
tariff, the general contraction, and the price effect on ad valorem rates, Irwin (1998b)
finds that Smoot-Hawley contributed between 4 and 8 percent of the overall decline in
imports, and the price effect contributed another 16 percent. Because imports were just 4
percent of U.S. GNP, the effect of the tariff must have been small, as macroeconomic
studies of its effect confirm (Eichengreen 1989, Crucini and Kahn 1996, 2003).
Was a similar pattern repeated in the duties that affected Cuban exports? Cuban
exports were comprised primarily of sugar (75 percent) and tobacco (14 percent). The
effect of Smoot-Hawley on tobacco exports was small; the average tariff rate on tobacco
products was increased by less than 3 percent. As for sugar, almost all exports of sugar to
the United States were raw. To that date, the tariff on refined sugar, which was set as the
differential between raw and refined rates, virtually prohibited imports of refined sugar
(Ballinger 1971, Taussig 1930). The effect of Smoot-Hawley on the ad valorem sugar
duty was similar, though below the average. It increased the specific duty on Cuban raws
by 13.3 percent, from 1.7648 to 2.0 cents per lb. (full-duty rates rose from 2.206 to 2.5
cents per lb.).
We saw in the Section 1 that a plausible counterfactual is to assume that the sugar
tariff had been left at its 1922 level of 1.7648 cents. In fact, the Democrat/progressive
Republican coalition would have succeeded in restoring that rate if Senator Smoot had
been a less aggressive defender of his interests or less effective at wielding the powers of
majority party leadership. Accepting its plausibility, the counterfactual increase in the
sugar tariff is assumed to be zero rather than the historical 13.3 percent. What effect did
this 13.3 percent difference in the tariff have on the quantity of sugar demanded in the
U.S. market? Following a standard approach in the existing sugar trade policy literature, I
use a two-country partial equilibrium model of the sugar industry that assumes log-linear
demands and supplies and tariff protection in one of the two countries.
The model assumes the supply and demand for sugar in two countries, the United
States and the rest of the world, have same log-linear form:
ln xi = θ 0i + θ1i ln p (1 + α i ) + θ 2 i ln zi
HS decomposition, 9/15/2005, 7:25:40 PM
9
where xi is the sugar supplied or demanded from country i , and zi is the income level.
The ad valorem equivalent tariff, αi , is greater than zero in the protected country (i = 1),
but zero in the unprotected country. The price of sugar in the unprotected rest of the
world is p. Assuming market clearance, the price and quantity responses to an exogenous
increase in the tariff and the general contraction are functions of the price and income
elasticities, θ1i and θ2i. An exogenous increase in the tariff in the protected country (the
United States) both reduces the quantity demanded at home and induces a shift of
supplies to the rest of the world. The tariff is expressed in ad valorem equivalent form for
tractability. Since the tariff was specific, the ad valorem equivalent has the form
α1 = t1 / p , where t1 is the specific rate. The counterfactual effect of the specific tariff
increase from 1.7648 to 2 cents, excluding the price effect, is identical to an increase in
the ad valorem rate of 13.3 percent.
To calibrate the effect of a tariff-induced price increase on the quantity of sugar
demanded in the United States, requires estimates of the relevant elasticities for the
United States and the rest of the world.
Demand elasticities. Evidence suggests that demands for sugar, as for other
commodities, may have experienced a structural change during the crisis. Kindleberger’s
1973 analysis of the world crisis impressed upon economic historians how physical
stocks accumulated in all the major world commodity markets in the middle and late
1920s as a consequence of the restoration of markets that had been dislocated during
World War I. In sugar, the problem of unsold physical stocks weighed heavily on the
minds of contemporary producers and dealers. In sugar, analysts first became alarmed
with the stock accumulations in 1925 when end-of-year unsold stocks first exceeded one
million tons – a magnitude that was unprecedented at that time, but soon superseded. By
1927, stocks had risen to about 1.5 million; then, in 1929 they surged to over 4 million
metric tons, amounting to 40 percent or more of the global export market.
From past experience, contemporary market specialists forecasted recoveries that
did not materialize. They began to doubt the validity of models formerly used to forecast
market conditions at a time of apparent malfunction of self-regulating market
mechanisms. By the early 1930s, the massive overhang of stocks of unsold sugar added
HS decomposition, 9/15/2005, 7:25:40 PM
10
to the uncertainty and doubts about using historical price behavior to predict market
conditions. Prices were dependent on how long the owners of unsold stocks of sugar
decided to hold them. Those decisions, naturally, were sensitive to expectations about the
future path of the sugar price; yet since the price did not appear to be consistent with
predictions based on past forecasting methods, it was difficult to predict how traders
would formulate their predictions or how they capriciously might react to changes in
market conditions. Under the circumstances, an elasticity estimate based on a model of
spot market clearing of demands and supplies may be inaccurate. Yet it is difficult to
model agents’ expectations about the future path of prices. The historical record shows
without question that sugar merchants and brokers repeatedly underestimated how far the
price of sugar would fall. Ordinarily, forecasts were based on historical patterns, but
radical changes in the market, unfamiliarity with large stock overhangs, and distrust of
forecasts using conventional models exacerbated the degree of uncertainty. Under these
conditions, market parameters were likely destabilized.
This presents a problem for econometric estimation since valid estimates depend
on the existence of stable parameters. As an alternative, I use contemporary specialists’
forecasts to “back out” the price elasticities of demand implicit in their analyses. This is
made possible by made possible by two contemporary forecasts in the archival record,
each of which gives price predictions for a range of possible market scenarios in 1932.
Two such forecasts are available. One forecast was made by Manuel Rionda and
Bernardo Braga Rionda of the leading New York sugar brokerage, Czarnikow-Rionda. It
predicts the price of sugar on the world market that would obtain from alternative
possible sizes of the Cuban sugar crop. (The Cuban crop was restricted in 1932, and the
government’s decision on its size was pending). The other forecast was an independent
estimate from the Cuban Sugar Stabilization Institute made in October 1932. Using a
similar method, this forecast produced contingent price forecasts by varying the
assumptions about the Cuban crop size. Both forecasts were described in private
documents and were part of ongoing dialogues inside the two organizations about the
HS decomposition, 9/15/2005, 7:25:40 PM
11
nature of the market. The genuineness of the forecasts is supported by the contexts in
which they appeared; neither was intended for public consumption.5
Both forecasts give predicted changes in the world market price of sugar for
hypothetical quantity changes. Calculation of elasticities requires data on quantities in the
world market, which are taken from reports of the International Sugar Council, and the
sugar price used was the end-of-week spot market price on Cubas, f.o.b New York for the
week corresponding with the date of the document in which the forecast appeared, taken
from the Journal of Commerce.6 The price elasticity of demand implicit in the RiondaBraga forecast is 0.33; the elasticity implicit in the Institute’s forecast was 0.17. For our
analysis, the lower figure is preferred because an overstatement of the U.S. price
elasticity of demand would exaggerate the effect of the tariff. Besides, there is reason to
believe that the larger estimate is overstated. Discussion of the circumstances of these
forecasts, the data, estimation procedure and possible biases is in Dye and Sicotte
(2005a).
Neither contemporary forecast distinguishes between U.S. and rest of the world
markets. The prices are forecasted net of duties paid in the United States. The two
markets were treated as fully integrated. The dealers who produced the forecasts, as part
of their businesses, monitored and exploited any opportunities for arbitrage.7 Other
estimates in the literature, using more recent data, produce separate estimates for the U.S.
and global or rest-of-the-world elasticities. Long-run estimates for the United States,
from the 1970s and 1980s, vary considerably, ranging from 0.16 to 0.6 (Schmitz and
Christian 1993, p. 74, n. 2). Since one would expect the elasticity to have fallen as
incomes grew, our estimate of 0.17, at the upper tail of more recent estimates, is
consistent. As for the rest-of-the-world, Marks (1993) finds for 1984-1988 that it was
lower than for the U.S. If that was also true in 1933, then assigning 0.17, which
overstates the world demand elasticity introduces a downward bias to the tariff-induced
5
The Rionda-Braga forecast appears in a letter from Rionda to Portuondo, Jan. 13, 1932. Braga Brothers
Collection, R.G.II Ser.10C Box 98 f. Sugar 1932: Chadbourne Committee, Corresp. with A. Portuondo.
The Institute’s forecast appears in: Memorandum entitled: “Exposición de motivos al acuerdo del Instituto
Cubano del Estabilización del Azúcar, recomendando una zafra de dos millones de tonelados para 1933,”
Oct. 1932, BB R.G. 2, Series 10c, Box 98, f. Sugar 1932: Chadbourne Committee, Corresp. with A.
Portuondo.
6
International Sugar Council (1937).
7
Braga Brothers Collection, Record Group 2, series 10C, passim.
HS decomposition, 9/15/2005, 7:25:40 PM
12
effect in the United States. From sensitivity analysis I find, however, that the effect of the
understatement, if it exists, is probably small. Doubling or halving the world demand
elasticity estimate changes the estimated effect of Smoot-Hawley on U.S. demand by less
than 3 percent.
Supply elasticities. We know from contemporary descriptions of market
conditions that supplies were elastic. The major exporting countries were producing at
levels well below capacity; plus the 4 million tons that overhung the market in 1929 grew
to over 6 million tons by 1932. That represented about half of the world export market,
after excluding domestic and colonial markets where nonpreferential exports were
prohibitive (Dye and Sicotte 2005a). However, though the model’s predictions are
sensitive to their relative magnitudes of the supply elasticities, they are not sensitive to
their absolute magnitudes. I assume the supply elasticities were identical. At the margins,
supply responses to price changes were determined by the path of future prices predicted
by holders of unsold physical stocks of sugar. These stocks were dispersed globally. In
1929-1930, 38 percent were warehoused in the United States, 30 percent were in various
European countries, and 28 percent were held by the two major international suppliers,
Cuba and Java. The conditions did not support segmented supplies between the protected
U.S. and the open world export markets. Sufficient quantities were located so that they
could respond at the margin to either market despite the protection. Supporting evidence
is given in Figure 2, which shows the coincidence of the price received in Cuba on sales
in New York and London prices, which are the best indicator of the non-U.S. world price
of sugar.8
Income elasticities. Assuming a plausible estimate for the income elasticity of 0.1
and the stated assumptions for price elasticities, the model predicts a decline in the
demand for sugar in the United States from 1929 to 1932 of 16 percent, from 6.9 to 5.7
million metric tons. This prediction incorporates the effect of the tariff increase, the fall
8
Cuban prices f.o.b. New York and London prices diverge in 1933 because of the establishment of the
quota system in the United State that includes a quota for Cuban imports. The program was not adopted
until 1934, but the price diverge diverges earlier because the market learned the Roosevelt administration’s
commitment to establish such a system in 1933 and begins to anticipated the wedge it would drive between
the price of Cuban sugar sold in the United States and elsewhere.
HS decomposition, 9/15/2005, 7:25:40 PM
13
in incomes, and the price effect on the ad valorem equivalent value due to the specific
tariff. The three predicted effects together explain 98.5 percent of the actual decline.9
Table 4 summarizes the predictions. The preferred counterfactual scenario
assumes the specific tariff remained at the previous 1.7648 cents per lb., but otherwise
the effect of fallen incomes on sugar demand and the price effect on the ad valorem tariff
rate remained in effect. Under this counterfactual, the model predicts that the depression
and the price effect on the ad valorem rate together explain 70 percent of the overall
decline in sugar demand, leaving 30 percent to be explained by the Smoot-Hawley tariff.
An alternative counterfactual scenario might assume that the tariff increase of 13.3
percent occurred but with no price effect and no general contraction. Under those
assumptions, the model predicts 20 percent of the historical decline, leaving 80 percent to
be explained by the combined income and deflation effects.
3. The Distribution of the Burden
The second step estimates how the burden of the reduction in the demand for
sugar in the United States was allocated between domestic and imported (Cuban)
suppliers. It is customary in empirical studies of markets to assume that supplies and
prices exhibit some well-behaved relationship. For example, a log-linear relationship is
often assumed, as in the above section, for its tractability. Empirical information gleaned
from production cost data advise that the assumption of a well-behaved, analytical curve
should be abandoned. Available data suggest that supply curves representative of each of
the relevant domestic and foreign supplier areas were heterogeneous and irregular.
The irregularities have a technological explanation. In sugar processing, a
significant portion of the technology was embedded in the equipment. Mills’ production
costs were therefore heterogeneous, and the distribution of costs region by region
depended on the history of investment and replacement of old with new milling
9
As an alternative, the income elasticity can be calibrated by treating it as an unknown but assuming that
the income effect is equal to the observed fall in demand minus the effect of the tariff increase and the
effect of deflation on the ad valorem equivalent tariff. By this approach, the estimated income elasticity is
0.16, which is slightly higher the double Marks’ (1993) estimate for the income elasticity of U.S. sugar
demand in the 1980s. Since one would have expected a fall in the income elasticity from 1929 to 1983-86,
the predictions of our simple model seem consistent with what should be expected.
HS decomposition, 9/15/2005, 7:25:40 PM
14
machinery.10 The tariff represented an additional cost to foreign producers for access to
the U.S. market, which affected their competitiveness relative to domestic producers.
Effective protection depended on both the relative costs between protected and
unprotected regions and the distribution of costs within regions.
The data alluded to are from the U.S. Tariff Commission (1926). They appear in a
report of the relative production costs of sugar in the U.S. mainland beet and cane sugar
industries, Hawaii, Puerto Rico and Cuba, which includes an estimate of the internal
distribution of costs within each supplier area. Figure 3 displays the distribution of unit
costs taken from the Tariff Commission survey for each supplier area by milling capacity
percentile, with the lowest-cost mills on the left, and the highest-cost on the right. One is
struck by variation both between and within supplier areas. First, within each supplier
area, unit costs of production are nonlinear – they rise at an increasing rate as one moves
from more to less efficient capacity. Second, assuming the samples are representative of
the regional industries, ignoring tariffs, Cuban producers had a substantial cost
advantage. Production costs there were lower than in any of the other supplier areas.11
Over 95 percent of Cuba’s mills had lower costs per unit than the most efficient mills in
the beet sugar industry. Even compared with Hawaii, which was famous for its state-ofthe-art technology, 85 percent of Cuban milling capacity was more cost-efficient. The
tariff, however, handicapped Cuban producers and brought its costs into a range that
made beet sugar competitive and gave the domestic cane sugar suppliers an artificial cost
advantage.
These data permit a reconstruction, under certain assumptions, of the
inframarginal supply curves for each of the supplier areas represented in the survey.12
Assuming that sugar processors had constant marginal costs of production up to a fixed
capacity and that they operated at optimal capacity, a supply curve for each supplier area
10
Dye (1998) examines the relevance of vintage-capital effects on the development of the Cuban sugar
industry in the 1920s.
11
Of the major supplier areas, only the Philippines is not represented in the survey. However, we know
from other sources that costs of production there tended to be significantly higher than in Hawaii.
12
The term “inframarginal” is employed to emphasize that the survey gave information only for active
mills at the time it was taken. Thereby, the cost data it contains reflects information only about the supply
curves inside the margin at which quantities cleared and the price was determined. It contains no
information about firms positioned to the right of the market-clearing quantities at the time the survey was
taken.
HS decomposition, 9/15/2005, 7:25:40 PM
15
can be constructed by rescaling the curves in Figure 4 by the quantities of raw-equivalent
sugar sold in the U.S. market by each supplier area.13 Figure 4 presents an example of
two such inframarginal supply curves drawn for 1929 quantities supplied. One curve
represents U.S. domestic suppliers, which combines the data from U.S. mainland beet
and cane sugar producers, Hawaii and Puerto Rico into a single curve, since none of these
were subject to customs duties. It assumes the distribution of unit costs in the Philippines,
which also had duty-free status, was equal to the supply-weighted average of the four
domestic areas represented in the survey. The other supply is for Cuba. The lower curve
on the figure indicates the distribution of production costs in Cuba not accounting for
customs duties. The higher two parallel curves reposition the lower curve by adding the
Fordney-McCumber tariff of 1.7648 cents and the Smoot-Hawley tariff of 2 cents per lb.
to the unit costs of each firm represented. The omission of a supply curve for other
foreign suppliers is not problematic because Cuba supplied 99 percent of all foreign
imports of sugar at that time.
The figure shows, for example, that domestic mills with unit production costs of 5
cents per lb. or less supplied about 2.8 million metric tons of U.S. consumption in 1929.
The Cuban supply curve (the lower curve) similarly weights the survey data by the
volume supplied to the U.S. market in 1929, thus showing, for example, that mills with
unit costs of 4 cents per lb. or less, not accounting for the tariff, supplied about 2.4
million metric tons. Two higher parallel Cuban curves indicate supply curves
incorporating duties of 1.7648 cents and 2 cents per lb., the respective pre- and postSmoot-Hawley tariffs on raw sugar. Finally, a joint supply curve is constructed that
combines the supplies of domestic and Cuban sources. It is drawn assuming the 1.7648cent specific tariff, the reigning rate in 1929, prior to Smoot-Hawley. Total U.S.
consumption that year was 6.88 million metric tons, which corresponds in the figure with
in the right extreme of the joint curve (at point A).
The information on the relative distributions of unit costs in each supplier area,
displayed Figure 4, is used to identify how the burden of the contraction of sugar demand
in the U.S. market was distributed between domestic supplier areas and Cuba. Point Jo
13
Also since the data include fixed costs, it implicitly assumes that the unit fixed costs at each firm’s
optimal capacity are proportional to the firm’s unit costs of production.
HS decomposition, 9/15/2005, 7:25:40 PM
16
shows the quantity sold in the U.S. market and the unit costs of the marginal (highestcost) active mill at the current market-clearing price. If the price should fall, and the
demand for sugar should contract, how the burden of contraction would be distributed
between domestic and Cuban mills can be inferred from the curves depicted. Assuming
that high-cost mills shut down first, mills positioned to the right on the joint curve should
shut down before mills to the left. The corresponding mill can also be identified as
domestic or Cuban so that the distribution of the burden of any possible reduction in
demand can be identified.
I refer to firms or supplier-area mill capacity as “at risk” of shutting down if it is
situated to the right of the market-clearing quantity demanded for given actual or
counterfactual demand reduction, relative to the 1929 reference base. “At risk” milling
capacity is defined as the highest-cost milling capacity active in 1929, from any supplier
area, sufficient to realize a reduction in active capacity equal to a given reduction in
demand. The calculus incorporates the appropriate tariff, paid by Cuban mills only, but
otherwise the “at risk classification is independent of location. I use the term “at risk,”
rather than “shut down,” because decisions to shut down or exit depended on other
factors not reflected in the unit costs. Most salient was the relative share of fixed unit
costs in unit costs. Unit fixed costs depended on both fixed costs and capacity utilization,
and both were heterogeneous between mills and supplier areas. Other factors included
access to capital, expectations about future market conditions, and substitutability of a
mill’s resources, which were partially location or industry-specific (Dye 1994).
To illustrate how to interpret the diagram, consider the counterfactual event in
which the Smoot-Hawley tariff was passed excluding the effect of the depression. In that
event, according to the model, the demand for sugar would have fallen from 6.9 to 6.0
million metric tons. The mill “at risk” mill capacity implied by this reduction in demand
is represented by the segment of the joint supply curve from Jo to J1. From the
inframarginal domestic and Cuban supply curves, assuming the tariff of 1.7648 cents, one
that almost all of the “at risk capacity” was in Cuba, identified by the segment from Co to
HS decomposition, 9/15/2005, 7:25:40 PM
17
C1. A much smaller segment of domestic mill capacity is “at risk,” identified by the
segment Do to D1.14
Table 5 shows the allocations of mill capacity at risk for Cuba and the U.S.
domestic supplier areas, including a breakdown of the domestic supplier areas into the
four areas represented in the Tariff Commission survey. The first row in the table shows
the predicted volume effect of the contraction assuming no increase in the tariff would
have caused demand to fall by 962,000 tons, or 14 percent of 1929 total sales. Supply
cuts from Cuba account for almost all of it. Domestic suppliers cut back only 21,000 tons.
Incorporation of the tariff increase, shown in the second row, reduces the predicted
quantity of sugar sold by another 355,000 tons, to 1.317 million tons, all of which comes
from cutbacks in Cuban exports. Figure 5 illustrates the procedure used to construct
Table 5. The disentangled effect of the tariff increase is depicted by the upward shifts of
the Cuban supply curve, incorporated into the joint curve. The movement from Jo to J1
shows the predicted fall in the quantity of sugar demanded implied by the contraction
including the increased ad valorem rate on the constant specific tariff, but excluding the
Smoot-Hawley increase. The movement from Jo to J2 depicts the combined predicted
effects of the contraction and Smoot-Hawley. The corresponding point Co, C1, and C2
indicate the Cuban capacity put at risk by the two sources of fallen demand.
The two disentangled effects together predict a 1.3 million-ton fall in demand
compared with the actual 1.2 million tons. The fall in imports from Cuba, however,
exceeded the overall reduction in U.S. demand by 0.9 million tons. The overshooting is
explained by additional production expansion of the domestic sugar industry during the
1929-1932 crisis. The only significant agricultural sector in the United States that
expanded during the crisis, protection stimulated expansion in domestic suppliers of
sugar as a whole by 0.6 million tons.15 Row 3 in Table 5 incorporates the domestic
expansion, assuming the additional capacity would be “best-practice” and would displace
“at risk” mills, as defined above, regardless of their domestic or foreign identity. It shows
that the expansion put 0.57 million tons at risk in Cuba and 0.02 million tons at risk in
14
Discuss the consistency of the at risk cost threshold with available data on fixed and operating
expenditures.
15
It might have been larger except for a crop shortfall in Louisiana from poor weather conditions (Dalton
1937).
HS decomposition, 9/15/2005, 7:25:40 PM
18
Louisiana and Hawaii. The additional capacity at risk is shown in Figure 5 as the
difference between C2 and C3, or equivalently, J2 and J3.
Between 1929 and 1932, demand for sugar fell in the United States by 20.9
percent, from 6.88 to 5.72 million metric tons. Supposing adjustments in market supplies
to reduced demand came about by the closure of higher unit-cost mills first, if the SmootHawley legislation had left the sugar tariff at the status-quo rate of 1.7648 cents per lb., I
estimate that the demand sugar would have only fallen by 14.0 percent. How did the
burden of the sugar demand contraction fall? In the historical event, imports from Cuba
fell by 2.14 million metric tons. It represented 31 percent of U.S. sugar consumption in
1929, and it exceeded the 1.17 million-ton reduction in the market from 1929 to 1932,
making way for expansion of the domestic industry. Since Cuba had such a strong cost
advantage, the reason for this shift in domestic and foreign market shares at this time of
crisis is explained by the tariff. If there had been no increase to the sugar tariff in 1930,
imports of sugar from Cuba would have fallen by 1.32 million tons – substantial but
significantly less than the actual decline – equal to 13.7 percent, instead of 31 percent, of
U.S. consumption in 1929. In all scenarios, over 97 percent of the burden of adjustment
falls on mills at risk in Cuba; nonetheless, the extent of the burden was significantly
increased by the increase in the tariff.
4. The Effect on Cuban Aggregates
How much did the loss of sugar exports to the United States caused by the tariff
increase have on the Cuban economy? According to estimates, Cuba’s total exports in
1929 were 46 percent of national income, but the fall in export revenues from 1929 to
1932 exceeded 70 percent of the estimated fall in national income. Moreover, export
revenues from sugar alone amounted to 35 percent of national income, and 81.5 percent
of the fall in Cuban total export revenues was from lost sugar exports (See Table 2). This
degree of openness and concentration of Cuba’s export activities in sugar exposed the
island’s economy seriously to risks of crisis in its principal industry. Breaking sugar
exports down by destination, shows that Cuba was also seriously exposed to the political
risk of increased protection in the United States. Of the 60 percent decline in export
HS decomposition, 9/15/2005, 7:25:40 PM
19
revenues in Cuba from 1929 to 1932, 70.1 percent were from sugar exports to the United
States, and 11.4 percent were from sugar exports to other destinations.
In the counterfactual, we must consider two types of resource transfers. Resources
could have been transferred between sugar and other sectors of the economy. Also sugar
intended for one export destination could be reallocated to another. In the former, if there
had been no increase in the sugar tariff, a portion of the resources that were released from
1929 to 1932 would have remained in the sugar industry. Consequently, non-sugar
production in the counterfactual would have been smaller than historical magnitudes.
Yet few resources made inactive in the sugar crisis appear to have been
transferred. Examination of production before and after the 1930 crisis shows no
significant absorption of resources into other sectors of the economy, either for internal
consumption or for other export products. For industrial sectors, an index of industrial
production, constructed by Jorge Pérez-López, shows that overall industrial production
declined by 45 percent from 1930 to 1933. Similarly, in non-sugar agricultural
production, the available data show no significant increase between 1929 and 1933.
Discussion of these findings is presented in Appendix 1. Some resources may have
shifted into subsistence activities, invisible in the data; however, land ownership patterns
and contemporary reports of widespread starvation suggest that that effect was small
(Foreign Policy Association 1935). Ignoring whatever small effects may have come from
these transfers introduces a bias that understates my conclusions, so I make no correction
for them in the results presented below.
Sugar left unsold in the United States may have been exported to other
destinations, but as noted above, unsold quantities of sugar exceeding half the exports to
the U.S. and other major markets combined were being warehoused awaiting better
market conditions. In the counterfactual, more sugar would have been exported to the
United States, and less would have been exported to non-U.S. destinations or
warehoused. By 1932, however, Cuba’s participation in an international sugar cartel
constrained the substitution of sugar between export destinations. In 1931, Cuba and
eight other major sugar exporters, which together represented 93 percent of the global
export market not behind tariff walls, formed an international sugar agreement to restrict
HS decomposition, 9/15/2005, 7:25:40 PM
20
exports.16 Export quotas to the non-U.S. sugar market were fixed, and the agreement was
scheduled to terminate in 1935. (None of the other exporters could compete with Cuba’s
preferential access to the U.S. market, so it was excluded from the agreement.)
Would Cuba have participated in the agreement in the counterfactual event? The
circumstances in which the agreement was formed suggest it probably would have. Cuba,
which was the leading advocate of the cartel, had tried to obtain an international
agreement as early as 1927. The main objective was to establish a cooperative orderly
marketing arrangement to eliminate the accumulated physical stocks of sugar. Assuming
no change in production levels, in the counterfactual, accumulated stocks would have
been lower from 6.4 to about 5.6 million metric tons. But since in 1927, when Cuba’s
official mission to negotiate an international agreement began, stocks had risen so far to
only 1.5 million tons, the conditions for Cuba’s advocacy of the agreement seem to
remain strong under the counterfactual. In 1927, the agreement failed to materialize
because the second largest producer, Java, did not see the cooperative agreement in their
interest. Cuba’s efforts came to fruition only after the accumulation of stocks induced
Java to change its position. Dye and Sicotte (2005a) show that Java and the other
participants remained committed to the agreement in 1932. Since their conditions do not
change materially under the counterfactual, there is no reason to think the cartel would
not have been formed.
Would the export quotas for the international agreement have been the same?
Cuba’s quota in the agreement would either have been close to the historical quota or
smaller. Most signatories agreed to hold exports at current levels but refused to accept
cutbacks. Only Cuba and Czechoslovakia conceded to significant cutbacks relative to
pre-agreement export levels. In the counterfactual, Cuba’s pre-agreement non-U.S.
exports would not have exceeded their historical level, and their holdings of stocks would
have been smaller (the resources upon which credible threats made the agreement selfenforcing); therefore, Cuban negotiators would not likely have able to bargain for a larger
16
The other signatories to the agreement were Belgium, Czechoslovakia, Germany, Hungary, Java, Peru,
Poland, and Yugoslavia. All other major producers served segmented markets behind protectionist walls or
with preferential access. See Dye and Sicotte (2005a).
HS decomposition, 9/15/2005, 7:25:40 PM
21
quota under the counterfactual. Most likely, the quota would have remained the same, but
if not, the small bias it would introduce understates my conclusions.
In the counterfactual event, therefore, I assume no difference in the effect of the
resource shift from sugar to non-sugar production between the historical and
counterfactual event in 1932, no difference in the contraction of non-sugar export
earnings, and non-U.S. exports are set equal to Cuba’s historical quota under the 1932
international sugar agreement. The value of sugar exports to the non-U.S. market is
determined by the price of sugar predicted for the counterfactual event by the model
discussed in Section 2. With these assumptions, I find that, if the tariff had not been
increased in 1930, the fall in earnings from sugar exports between 1929 and 1932 would
have been approximately 65 percent of the actual decline, and total export revenues
would have fallen by 44 percent, instead of the 60 percent drop that the historical data
show.
How would macroeconomic performance have changed if the tariff had not
increased? Because of the predominance of sugar in the economy, adverse shocks to the
sugar industry reverberated severely in the rest of the economy. The paucity of data and
understanding of the details of intersectoral linkages make it impossible to trace its
effects sector by sector. Nonetheless, if we assume that the crisis in Cuba was strictly of
external origins and exports were the only channel through which it was transmitted, then
the ratio of the counterfactual to the actual change in aggregate income would be equal to
the ratio of the counterfactual to the actual change in export earnings.
To see this, let x be exports and z be all other goods produced domestically in
Cuba. The assumption implies that z is a function of x , besides many other factors.
Suppressing other exogenous factors, y = x + z ( x ) , and
counterfactual event, then
dyˆ
dxˆ
=
dy
dx
dy
dx
= 1 + z '( x ) . Let ^ indicate the
= 1 + z '( x ) . From this we can infer than national income
would have fallen by 58 percent of the historical drop between 1929 and 1932. Using
Alienes’ estimates for national income, it implies that Cuba’s aggregate income in 1932,
if Smoot-Hawley had not raised the sugar tariff, would have been 13 percent higher.
HS decomposition, 9/15/2005, 7:25:40 PM
22
5. Long-run Institutional Effects
The immediate effects of the crisis and tariff estimated in the previous sections(s)
represent a one-time cost to the Cuban economy caused by the Smoot-Hawley tariff. Yet
leaving the assessment of the effects of the 1930 tariff at its immediate effects is
misleading because it overlooks how the immediate effect of the tariff may have had
long-run consequences. This section shows that the long-run was significant, that is, that
the immediate impact of the tariff increase on Cuban sugar exports to the United States
was made persistent because it was embedded in the institutions that governed the U.S.Cuban sugar trade from 1934 to 1960.
One might entertain a number of possible paths that the long-run effects could
have taken through Cuba’s political or institutional history. For example, contemporaries
commented that an alternative sugar price history might have changed the degree of
political instability. The crisis of 1930 unleashed an insurgent movement in Cuba that
overthrew the dictatorial Machado regime in August 1933. A U.S. foreign attaché in
Cuba wrote an observation in a State Department memorandum noting that residents in
Cuba understood intimately – that the political unrest of the time could have been
avoided if the price of sugar had been higher.17 Ambassador Guggenheim remarked:
“Unfortunately, the revolutionary movement is not instigated by inspired leaders, but is
born of the misery on the island … .” … “The basic cause of the revolutionary sentiment
is poverty… .”18 And in retrospect, he wrote in 1934 (Guggenheim 1934, p. 139):
The increase in the Hawley-Smoot Act of ¼ cent per pound on the duty on Cuban sugar merely
added a layer to the tariff wall, which was already too high. It took effect a very short time after I
assumed my post in Cuba. Before I left the United States, I discussed the sugar tariff with
President Hoover. He was strongly in opposition to the proposed enormous increase of over 1 1/8
cents, and he later told me that in securing a compromise at ¼ cent, he had been just to both sides.
17
The U.S. Chargé d’Affairs, Reed, commented that: There is so much truth in the assertion that
the country’s political discontent is attributable in large measure to its economic ills that discussion of the
point seems unnecessary. I may say, however, that in every conversation I’ve had with Cubans and
Americans who are opposed to the Machado administration I have asked the following question: If sugar
were selling at three cents a pound, would the present political agitation continue? The answer has
invariably been: No. (U.S. State Dept., Sept. 23,1930, p. 658).
18
U.S. Department of State, Nov. 24,1930 and Dec. 12, 1930, pp. 676, 678.
HS decomposition, 9/15/2005, 7:25:40 PM
23
… The passage of the law, whatever its values were to the American industry, caused dismay in
Cuba where bad times, which had preceded our own depression by several years, had already
created a difficult economic situation and pointed the way to a bad political condition.
The political revolution that ensued laid important institutional groundwork for the
radicalization of Cuban politics in the decades to follow. The populist constitutional
reform of 1940, a product of the 1933 revolutionary regime, was the focal point behind
which Castro’s July 26th Movement rallied popular support in the 1950s (Pérez-Stable
1993).
If the sugar crisis had been milder, might the collapse of the Machado regime and
the watershed in Cuban politics that ensued have been averted? If so, what long-run
consequence would it have had for Cuban political history? The elaborate counterfactual
required makes it difficult, if not impossible, to undertake any sort of formal examination
of the question. Most probably, the higher price and export earnings that would have
obtained in the absence of the 1930 sugar tariff increase would have been insufficient to
avert the political crisis, though it might have changed its timing and character.
The analysis here adopts a more modest approach. It asks: What if the rules and
principles that governed the operation of the quota system in the United States after 1934
remained the same in the counterfactual event as the historical rules? The counterfactual
thus considers no major changes in Cuban political history, focusing strictly on the
effects of the disentangled increase in the sugar tariff under Smoot-Hawley on objective
institutional features that governed the U.S.-Cuban sugar trade once international crisis
and the Cuban Revolution of 1933 had passed.
The relevant institution was the system of production and import quotas that
governed the U.S.-Cuban sugar trade, set up, in particular, by the passage of the JonesCostigan Act of 1934, which qualified sugar beets and sugarcane as eligible for New
Deal agricultural relief measures by designating them as “basic agricultural commodities”
under the Agricultural Adjustment Act of 1933. The rules set up by the U.S. federal
government to allocate quota assignments between supplier areas institutionalized the
volume effects from the crisis and increased protection and caused them to persist long
after the immediate effects of the crisis were gone. The counterfactual analysis in this
HS decomposition, 9/15/2005, 7:25:40 PM
24
section explains why the effect would have persisted. If there were no alteration of the
rules for assigning quotas, the import quotas assigned annually to Cuba would have been
significantly higher if there had been no increase in the sugar tariff in 1930. What’s more,
the significance lasted throughout the ensuing twenty-five years, built into the formal and
informal rules for assigning quotas under the program. The historically remote event in
1930 thus acted as a path-dependent constraint on Cuban national income, even up to the
Cuban Revolution of 1959.
Quantification of the counterfactual hinges on the fact that the rules provided that
quota allocations were made on the basis of historical sales volumes in the U.S. sugar
market, including imports. Counterfactual quota assignments are, therefore, calculated
simply by taking the rules for assigning quotas as given but replacing the historical levels
of sugar sales for each of the supplier areas with the imputed levels based on the
counterfactual of no increase in the sugar tariff in 1930. Figure 6 displays the paths of the
historical exports (solid curve) and estimated counterfactual exports (dotted curve). The
latter is calculated from the rule-based formulas required by law for determination of the
quotas. It replaces the historical path of exports with the counterfactual path of exports,
but only for the years 1930 to 1933.19 The remainder of the path is generated by the
application of the rules, which depends on previous years’ exports. Before interpreting
the path shown here, we must consider these rules.
The Jones-Costigan legislation of 1934 established the initial set of quotaassignment rules. It provided for the assignment of sugar quotas at two levels. At the first
level, general supplier-area quotas were assigned to each of the major supplier areas,
identified as mainland beet and cane sugar; the insular possessions, Hawaii, Puerto Rico,
the Virgin Island, and the Philippines; and Cuba and other foreign sugar. Then, at the
second, crop restrictions were implemented within each domestic supplier area, with
individual producers. Arrangements involved crop curtailment contracts with growers of
sugar beet or cane and sales quotas for sugar processors.20 Cuba and other foreign
19
The
“Processors” were the owners of factories that elaborated raw material, sugar beets or sugarcane, into
either raw or direct-consumption sugar.
20
HS decomposition, 9/15/2005, 7:25:40 PM
25
suppliers were assigned an import quota but were free to determine for themselves how
the rights to it would be distributed to individual producers in their countries.
The first column of Table 7 gives the supplier-area quotas set in 1934. Mainland
beet and cane sugar areas were given fixed minimum quotas of 1.55 and 0.26 million
short tons, respectively, plus 30 percent of any growth in the US market beyond 6.452
million short tons. The remainder of the aggregate “consumption needs” each year was
apportioned between the insular possessions and foreigners on the basis of
“representative historical sales” levels. Annual “consumption needs” was the aggregate
quantity specified to be sold, determined by the USDA to meet a predetermined price
target. The law defined “representative historical sales” as any three consecutive years
between 1925 and 1933, as selected by the Secretary of Agriculture. The Secretary of
Agriculture in 1934, Henry A. Wallace, chose to use the 1931-1933 period as
representative for all supplier areas except Hawaii, for which 1930-32 was treated as
representative (Wolf 1958).21 This rule for assigning quotas remained in effect through
1936. Applying the rules using the average of the counterfactual export estimates for
1931-1933 generates the counterfactual series in Figure 6 from 1934 to 1936. A revision
to the sugar program was legislated in 1937, which altered the quota-assignment rules.
Then, the quota system was suspended between 1941 and 1947, replaced by wartime
government controls; but it was reinstated and revised in 1948, and revised again 1951
and 1956. Cuba’s quota was eliminated in 1960.
Yet the rules in each of the revisions depended on the foregoing sales history
since the program’s inauguration in 1934. In 1937, the main alteration to the quotasetting rules was that fixed minimum quotas for the mainland were dropped, and all
supplier-area quotas were made proportional to USDA-specified aggregate “consumption
needs.” Significantly, the quotas assigned under the 1937 revision depended on the
quotas assigned under the 1934 law because the proportions set by the 1937 law were
equal to the average sales of each supplier area between 1934 and 1936 inclusive. The
quotas set by the 1948 revision were similarly dependent on past quotas. The rules
21
This had the effect of reducing Hawaii’s quota marginally.
HS decomposition, 9/15/2005, 7:25:40 PM
26
restored fixed quotas for the mainland and gave them also to the insular possessions.22
Cuba received 98.64 percent of the difference between the USDA-specified
“consumption needs” and the fixed quotas. Other foreign suppliers supplied the
remainder. However, like the 1934 legislation, the fixed quotas for the mainland
producers exceeded their historical levels of production, but the market shares implied by
the fixed quotas for the insular possessions and the expected quotas for foreign suppliers
for 1948 were based on their average shares during the previous period of operation from
1934 to 1940. The 1951 and 1956 revisions were similar in this respect. The adherence to
the norm of allocating quotas on the basis of historical market shares caused the initial
quota assignments in 1934 to be passed on from one revision to the next.
Assuming the use of historical market shares for determining quota-setting rules
was independent of Smoot-Hawley, the counterfactual path of quotas from 1937 to 1958
is determined by substituting the appropriate historical shares with the counterfactual
shares into the rule-based formulas for quota assignments as determined by each revision.
This is how the counterfactual path of exports was calculated in Figure 6. An additional
complication arises from a distinction in the operation of the program between initial and
final quotas. The rules for assigning quotas discussed in the preceding paragraphs applied
in practice to the initial quotas, which were announced at the beginning of each calendar
year. For final (end-of-year) quotas, adjustments were usually required to correct for
supplier-area quota deficits and modifications to the aggregate “consumption needs,”
which the USDA was accustomed to make when forecasts were off the mark. In the
figure, the narrow curves display the initial actual quotas and the bold curves show the
final quotas. In each case, the solid lines represent the actual and the dotted lines are the
counterfactual. The computation to obtain the counterfactual final quotas assumes quota
reallocations (the difference between final and initial quotas) in a given year were the
same in the actual and counterfactual exports.
Figure 7 gives the corresponding actual and counterfactual earnings in Cuba from
sugar exports to the United States. It shows that, during the operation of the program
22
This includes the Philippines, which had obtained its independence and therefore was a “foreign
supplier.” However the treaty of independence guaranteed the Philippines a fixed quota, which was
honored in the sugar program.
HS decomposition, 9/15/2005, 7:25:40 PM
27
from 1934 to 1940, Cuba’s export earnings from sales to the United States would on
average have been 27 percent higher, and even during the more distant period of
operation from 1948 to 1958 they would have been 8 percent higher. An approximation
of how this affected national income is obtained from a “back-of-the-envelope”
calculation, using an estimate of the export multiplier. Figure 8 uses the imputed export
multiplier of 2.27, obtained from the previous section of the paper. It shows that the
effect of the contractionary effect of Smoot-Hawley on Cuban national income,
channeled through its persistence on the U.S. sugar quota, peaked in 1933 at 22 percent
of national income. The annual loss of national income due to the persistent effect of the
1930 tariff increase averaged 13 percent from 1931 to 1940 and 3 percent from 1948 to
1958.
The validity of these results depends on whether the use of the historical market
shares to determine the allocation of quotas in 1934 was independent of whether the tariff
had been increased in 1930, and whether the norms based on historical shares for
determining quota allocations would have been altered if Cuba’s export performance had
been as implied by the counterfactual.
Conclusion
Reviewing the two principal results of the analysis, I find that Smoot-Hawley had
both a large immediate effect on the crisis in Cuba, and indirectly it had an enduring
effect on the long-run prosperity of the country because the initial effect of the increased
protection was later embedded in the institutions of the U.S. sugar program. First,
regarding the immediate effect, a counterfactual that assumes away the increase in the
sugar tariff hypothetically, but maintains the effects of the general contraction and the
price effect on the ad valorem tariff rate, accounts for the larger part (65 percent) of the
historical impact of the crisis on the Cuban economy. Nevertheless, a substantial share of
the impact (35 percent), according to the analysis, was caused by the tariff increase. One
reason the effect was so large was that the tariff increase was discriminatory – it applied
only to Cuban sugar imports. All other non-negligible active suppliers were exempt from
the measure; therefore, the impact was concentrated on a single regional supplier.
HS decomposition, 9/15/2005, 7:25:40 PM
28
Another factor was historically determined distribution of each supplier area’s
unit costs of production, as shown in Figures 4 and 5. The 1930 sugar tariff increase so
perfectly targeted Cuban firms while missing domestic producers that it seems
premeditated. In fact, the Tariff Commission survey of the costs of production was
publicly available. It was certainly possible that the minimum necessary tariff increase
was carefully calculated by domestic sugar interests. In any case, it is striking that,
despite dramatic reductions in all other major agricultural commodities in the United
States saw, domestic sugar production actually expanded – on the mainland and in the
insular possessions. Domestic interests and some bureaucrats in the Department of
Agriculture saw expansion of beet sugar production as an opportunity for farmers in
depressed corn and wheat markets to substitute into sugar beet production. All of this
occurred, not in a positive but a negative-sum game, so to speak. The pie was shrinking;
nonetheless, domestic producers expanded production because the tariff was sufficient to
displace all production cutbacks onto the Cuban industry.
Cuban mill owners, sugarcane growers, field workers, indeed, the entire
population were seriously hurt by the crisis. From the standpoint of U.S. political
economy, North Americans were also counted among the losers. Refiners paid higher
prices for raw sugar; consumers paid higher prices for sugar. Many of the North
American sugar companies, owning 70 percent of the industry in Cuba, went bankrupt.
Banks in New York City had acquired many of those properties through foreclosure in
the 1920s and held onto them waiting for better market conditions before selling. Officers
in these banks were surprised by the losses in Cuban sugar; even in 1927, they were still
expecting the sugar market to recover soon (U.S. Senate 1929, p. 1338).
North American banks had plunged too deeply into Cuban sugar and were badly
exposed at the time of the crisis. National City Bank is a case in point. During World War
I, National City’s Havana branch had pumped an unwise share of its assets into Cuban
sugar. When in 1921 Cuba experienced its worst sugar crisis in decades, the bank’s
exposure amounted to $79 million, 80 percent of the bank’s total capital. Through
foreclosure or purchase National City acquired and began to operate eight large sugar
HS decomposition, 9/15/2005, 7:25:40 PM
29
mills, valued at $30-35 million.23 Though its exposure was reduced, in June 1929, it still
had $46 million in commercial loans on the books of its Cuban branches, which
amounted to 16 percent of loans in its foreign operations and 4 percent overall. The bank
set up a subsidiary, General Sugars Co., to operate is Cuban sugar properties, which
became wholly owned by its investment banking subsidiary, National City Co., in 1927.
In 1931 City Co. wrote down the entire investment in General Sugars from $25 million to
$1. By 1932 it had suffered capital losses equal to 84 percent of its 1929 capital.
(Cleveland and Huertas 1985, pp. 106, 125-27, 160-61, 165, 391-92; U.S. Senate 1929,
Part 3, p. 1322). Although National City Bank was the most deeply committed, others
were not too far behind, including the Royal Bank of Canada, which owned eleven sugar
mills, Chase National, First National of Boston, Merchant’s National of Boston, Bankers
Trust (J.P. Morgan), Sullivan and Cromwell (Jenks 1928; Smith 1960; Pino-Santos 1973;
McDowall 1993).
If the crisis in Cuban sugar contributed to the weakening of U.S. financial
institutions, could this repercussion have helped to deepen the crisis in the United States?
If so, the estimates here do not account for them. The accepted view in the literature is
that Smoot-Hawley did not contribute much, if anything, to the depression in the United
States. Eichengreen argues that only with large indirect repercussions, from acts such as
retaliation (which he concludes were not extensive enough), would the tariff have
contributed to the crisis in the United States (1989, p. 22). But Crucini and Kahn (2003)
suggest that focus on standard propagation channels may cause researchers too narrow.
Odell and Weidenmier (2004), meanwhile, have recently shown that distant localized
shocks can have global consequences. They find strong evidence of a link between the
San Francisco earthquake of 1906 and the Panic of 1907. Evidence traces the localized
effect of the earthquake to unusual gold flows, triggered by claims filed on fire insurance
policies in London, to defensive actions by the Bank of England to the Panic. The effect
of the localized event was amplified by the concentration of foreign insurers in San
Francisco. The concentration of bank assets in sugar makes the Cuban sugar crisis a
23
Its mills accounted for about 5 percent of Cuba’s sugar production capacity.
HS decomposition, 9/15/2005, 7:25:40 PM
30
candidate for similar reverberations. 24 Research has yet to explore the transmission of
these local offshore effects back onto the mainland; so it is an open question whether they
mattered and how much.
The argument that Smoot-Hawley had long-run institutional effects that were
considerably broader but worked through the crisis in Cuban sugar is even more
compelling. A series of path-dependent events link the post-1930 political reaction to
Smoot-Hawley and the post-1945 transformation of U.S. trade policy from protectionism
to global liberalization after 1945. Political scientists argue that the Reciprocal Trade
Agreements Act (RTAA) of 1934 laid necessary groundwork in domestic political
institutions that enabled the United States’ emergence as a leader in international
liberalization movement that materialized in the GATT. The key institutional innovation
was the delegation of authority to the president to negotiate reciprocal trade agreements –
a constitutional power that Congress had formerly jealously guarded.25 The literature
expresses a general belief that the political reaction against the Smoot-Hawley tariff was
a force behind the enactment of the RTAA (Haggard 1988; Bailey, Goldstein, and
Weingast 1997; Irwin and Kroszner 1999; Irwin 1998b).
Recent breakdowns in the Doha Round of WTO negotiations, however, remind
one of the tenuous commitment to liberalization that the United States has sometimes
had, particularly in agriculture. In international trade negotiations, the United States is
known for advocating general policies of liberalization while demanding escape clauses
and policy instruments, such as unfair trade laws, countervailing duties, agricultural
support programs, etc., that give domestic interests alternative recourse for seeking
protection (Krueger 1993; Libecap 1998). Scholars trace the origins of agricultural
exceptionalism in U.S. trade policy as the New Deal answer to the failure of SmootHawley, which was originally intended as agricultural relief (Goldstein 1989, 1993;
Haggard 1993; Schattschneider 1935). Sugar led the way. The AAA was originally
24
Kindleberger (1973) suggests a link through U.S. lard exports. Farmers believed the prices of hogs and
corn were linked to the collapse in the lard export market, which was highly concentrated – Cuban
imported 26 percent, and Germany another 10 percent (p. 96). Kindleberger suggests a link through U.S.
lard exports. Farmers believed the prices of hogs and corn were linked to the collapse in the lard export
market, which was highly concentrated – Cuban imported 26 percent, and Germany another 10 percent (p.
96).
25
A second important institutional feature was the adoption of the principle of unconditional most-favorednation status in trade agreements.
HS decomposition, 9/15/2005, 7:25:40 PM
31
applied to agricultural commodities that were not import-competing. The ad hoc solutions
the Roosevelt administration found to address domestic sugar’s demands for increased
protection, by introducing the import quota into AAA policy, carved the institutional path
by which the Department of Agriculture influenced trade policy in agriculture (Dalton
1937).
Krueger (1996) has shown how the sugar quota program fortified the rent-seeking
protectionism for domestic sugar interests thereafter. Over the next twenty-five years, the
Departments of Agriculture and State worked at cross-purposes over the United States’
trade policy toward Cuba. The treatment of Cuba in the sugar program later became an
important factor in the breakdown of the Batista regime and the strong anti-U.S. reaction
that followed in the Castro regime (Dye and Sicotte 2004). The enduring cold war
between the United States and Cuba that followed has been costly. Yet the opposition to
liberalization of agriculture from sugar interests remains strong. In 2001, the United
States’ failed to comply with a scheduled lifting of barriers to sugar imports under
NAFTA, which prompted crisis and nationalization of the Mexican sugar industry. More
recently the sugar lobby has been a factor in the standoff between the less-developed and
industrialized countries over agricultural liberalization in the WTO. It seems implausible
that the elimination of a small 13.3 percent increase in the sugar tariff in 1930 might have
attenuated some of the bitter U.S.-Cuban conflict or political power of the U.S. sugar
lobby. Yet, if one tries to trace the source of these political issues to their origins, it
cannot be said that Smoot-Hawley didn’t matter.
HS decomposition, 9/15/2005, 7:25:40 PM
32
References
Archibald, Robert B, and David H. Feldman (2000). “Effective Rates of Protection and the FordneyMcCumber and Smoot-Hawley Tariff Acts: Comment and Revised Estimates.” Applied Economics,
32.9 (July 2000): 1223-26.
Alienes Urosa, Julian (1950). Caracteristicas fundamentales de la economia cubana, Biblioteca de
Economia Cubana, Banco Nacional de Cuba.
Alvarez Díaz, José R., et al. (1963). Un estudio sobre Cuba. Miami: University of Miami Press, 1963
Anuario Azucarero (1959). Havana: Cuba Económica y Financiera.
Ayala, César J. (1999). American Sugar Kingdom: The Plantation Economy of the Spanish Caribbean
1898-1934. Chapel Hill: University of North Carolina Press.
Bailey, Michael; Goldstein, Judith; and Weingast, Barry (1977). “The Institutional Roots of American
Trade Policy: Politics, Coalitions, and International Trade, 49 World Politics: 309-38
Ballinger, Roy A (1971). A History of Sugar Marketing. U.S. Department of Agriculture. Economic
Research Service, Agricultural Report No. 197. Feb. 1971.
Callahan, C., J. McDonald, and A. O'Brien (1994). “Who Voted for Smoot-Hawley?” 54 Journal of
Economic History 683-690.
Cleveland, Harold van B., and Thomas F. Huertas (1985). Citibank 1812-1970. Cambridge, MA: Harvard
University Press.
Cortes Conde, Roberto (1992). “Export-led Growth in Latin America: 1870-1930.” Journal of Latin
American Studies 24 Quincentenary Supplement: 163-80.
Crucini, Mario and James Kahn (1996). "Tariffs and Aggregate Economic Activity: Lessons from the Great
Depression," 38 Journal of Monetary Economics 427-67.
Crucini, Mario and James Kahn (2003). “Tariffs and the Great Depression Revisited,” Federal Reserve
Bank of New York, Staff Reports, Staff Report no. 172. Sept. 2003.
Cuba, República de, Secretaría de Agricultura, Comercio y Trabajo, Memoria de la zafra, annual.
Dalton, John (1937). Sugar: A Case of Government Control. New York: Macmillan.
Dye, Alan (1998). Cuban Sugar in the Age of Mass Production: Technology and the Economics of the
Sugar Central, 1899-1929. Stanford, California: Stanford University Press.
Dye, Alan (1994). “Avoiding Holdup: Asset Specificity and Technical Change in the Cuban Sugar
Industry, 1899-1929.” Journal of Economic History 54: 628-53.
Dye, Alan, and Richard Sicotte (2004). “The U.S. Sugar Program and the Cuban Revolution.” Journal of
Economic History 64.3: 673-704.
Dye, Alan, and Richard Sicotte (2005a) “How Brinkmanship Saved Chadbourne: Credibility and the
International Sugar Agreement of 1931.” Explorations in Economic History (forthcoming).
Dye, Alan, and Richard Sicotte (2005b). “The Institutional Determinants of the Smoot-Hawley Tariff,”
working paper.
Eichengreen, Barry. “The Political Economy of the Smoot-Hawley Tariff.” Research in Economic History
12 (1989): 1-43
Farr and Co., Manual of Sugar Companies, annual.
Foreign Policy Association. Commission on Cuban Affairs (1935). Problems of the New Cuba: Report of
the Commission on Cuban Affairs. New York: Foreign Policy Association.
Goldstein, Judith (1989). “The Impact of Ideas on Trade Policy: The Origins of the U.S. Agricultural and
Manufacturing Policies.” International Organization 43.1 (1989): 31-71.
HS decomposition, 9/15/2005, 7:25:40 PM
33
Goldstein, Judith (1993). Ideas, Interests and American Trade Policy. Ithaca, NY: Cornell University Press.
Guggenheim, Harry F. (1934). United States and Cuba: A Study in International Relations. New York:
Macmillan.
Haggard, Stephan (1989). “The Institutional Foundations of Hegemony: Explaining the Reciprocal Trade
Agreements Act of 1934.” International Organization 42.1: 91-119.
Hayford, Marc, and Carl A. Pasurka (1991). “Effective Rates of Protection and the Fordney-McCumber
and Smoot-Hawley Tariff Acts.” Applied Economics: 1385-92.
International Sugar Council (1937). Statistical Tables.
Irwin, Douglas A. (1998a). “From the Smoot-Hawley Tariff to Reciprocal Trade Agreements: Changing
the Course of U.S. Trade Policy in the 1930s.” In Michael Bordo, Claudia Goldin and Eugene White,
The Defining Moment: The Great Depression and the American Economy in the Twentieth Century.
Pp. 325-52. University of Chicago Press.
Irwin, Douglas A. (1998b). “The Smoot-Hawley Tariff: A Quantitative Assessment.” Review of Economics
and Statistics 80.2 (May), 326-34.
Irwin. Douglas A., and Randall S. Kroszner (1996). “Log-rolling and Economic Interests in the Passage of
the Smoot-Hawley Tariff.” Carnegie-Rochester Conference Series on Public Policy 45: 173-200.
Irwin, Douglas A., and Randall S. Kroszner (1999). “Interests, Institutions, and Ideology in Securing Policy
Change: The Republican Conversion to Trade Liberalization after Smoot-Hawley.” Journal of Law
and Economics 42: 643-73.
Jenks, Leland Hamilton (1928). Our Cuban Colony: A Study in Sugar. New York, Vanguard Press.
Jones, Joseph M. (1934). Tariff Retaliation: Repercussions of the Hawley-Smoot Bill. University of
Pennsylvania Press.
Kaplan, Edward S. (1996). American Trade Policy, 1923-1995. Westport, CT: Greenwood Press.
Kindleberger, Charles (1973), The World in Depression, 1929-1939. Berkeley: University of California
Press.
Krueger, Anne (1996). “The Political Economy of Controls: American Sugar,” in Lee Alston, Thráinn
Eggertsson, and Douglass North, eds., Empirical Studies in Institutional Change. Cambridge
University Press; first appeared in Maurice Scott and Deepak Lal, eds., Public Policy and
Development: Essays in Honour of Ian Little. Oxford University Press, 1990.
Libecap, Gary (1998). “The Great Depression and the Regulating State: Federal Government Regulation of
Agriculture, 1884-1970.” In Michael Bordo, Claudia Goldin and Eugene White, The Defining
Moment: The Great Depression and the American Economy in the Twentieth Century. Pp. 181-226.
University of Chicago Press.
McDonald, Judith, Anthony Patrick O’Brien, and Colleen M. Callahan (1997). “Trade Wars: Canada’s
Reaction to the Smoot-Hawley Tariff.” Journal of Economic History 57.4: 802-26.
McDowall, Duncan (1993). Quick to the Frontier: Canada's Royal Bank. McClelland & Stewart.
Marks, Stephen (1993). “A Reassessment of Empirical Evidence on the U.S. Sugar Program.” In Stephen
Marks and Keith Maskus, eds., The Economics and Politics of World Sugar Policies. Ann Arbor, MI:
University of Michigan Press.
Moreno Fraginals, Manuel. El ingenio: Complejo, económico social cubano de azúcar. Havana:
Editorial de Ciencias Sociales, 1978
Odell, Kerry A., and Marc D. Weidenmier (2004). “Real Shock, Monetary Aftershock: The 1906 San
Francisco Earthquake and the Panic of 1907.” Journal of Economic History 64.4: 1002-27.
HS decomposition, 9/15/2005, 7:25:40 PM
34
Pérez-López, Jorge F. “An Index of Cuban Industrial Output, 1930-58.” In James Wilkie and Kenneth
Ruddle, eds., Quantitative Latin American Studies: Methods and Findings. Supplement 6 of
Statistical Abstract of Latin America. Los Angeles: UCLA Latin American Center, 1977
Pérez-Stable, Marifeli (1993). The Cuban Revolution: Origins, Course and Legacy. New York: Oxford
University Press.
Pino-Santos, Oscar (1973). El asalto a Cuba por la oligarquía financiera yanqui. Havana: Casa de la
Américas.
Pollitt, Brian H. (1982). “The Cuban Sugar Economy and the Great Depression.” Bulletin of Latin
American Research 2.1: 5-28.
Santamaría García, Antonio (2001). Sin azúcar no hay país. La industria azucarera y la economía cubana
(1919-1939). Universidad de Sevilla, Consejo Superior de Investigaciones Científicas.
Santamaría García, Antonio (1999). “El crecimiento económico de Cuba republicana (1902-1959). Una
revisión y nuevas estimaciones en perspectiva comparada (población, inmigración golondrina, ingreso
no azucarero y producto nacional bruto,” Revista de Indias 222.
Schattschneider, E. E. (1935). Politics, Pressures and the Tariff. New York: Prentice-Hall.
Schmitz, Andrew, and Douglas Christian (1993). “The Economics and Politics of U.S. Sugar Policy.” In
Stephen Marks and Keith Maskus, eds., The Economics and Politics of World Sugar Policies. Ann
Arbor, MI: University of Michigan Press.
Smith, Robert Freeman (1960). The United States and Cuba: Business and Diplomacy, 1917-1960. New
York: Bookman Associates.
Taussig, F. W. (1930). “The Tariff Act of 1930.” Quarterly Journal of Economics 45.1: 1-21.
U.S. Congress, Committee on Agriculture (1962). History and Operation of the U.S. Sugar Program.
Washington, D.C.: GPO.
U.S. Senate (1929). Hearing of the Subcomittee of the Committee on the Judiciary, United States Senate,
71st Congress, 1st session pursuant to S. Res. 20, A Resolution to Investigate the Activities of Lobbying
Association and Lobbyists in and around Washington, District of Columbia. Washington, D.C.: GPO.
U.S. State Department (1930). Foreign Relations of the United States, Publication No. 2319, Washington,
D.C.
U.S. Tariff Commission (1926). Sugar. A Report to the President … . Washington D. C.: GPO.
Véliz, Claudio (1980). The Centralist Tradition in Latin America. Princeton University Press.
Wallich, Henry C. (1960). Monetary Problems of an Export Economy: The Cuban Experience 1914-1947.
Cambridge, MA: Harvard University Press.
Willett and Gray. Willett & Gray’s Weekly Statistical Sugar Trade Journal.
Wolf, Harold A. (1958). “The United States Sugar Policy and its Impact upon Cuba: A Reappraisal.” Ph.D.
dissertation, University of Michigan.
Zanetti Lecuona, Oscar (1989). Los cautivos de la reciprocidad. Havana: Ministerio de la Educación
Superior.
HS decomposition, 9/15/2005, 7:25:40 PM
35
Table 1: Supplier Areas in the U.S. Sugar Market
Thousands of metric tons
Mainland
Beet
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
989.5
654.9
855.3
1057.6
886.1
870.7
1061.2
1029.4
987.7
1172.8
1218.1
1196.3
1239.0
Cane
Hawaii
296.6
268.5
156.0
81.6
128.8
43.5
65.3
123.4
197.7
195.0
186.8
145.1
285.7
490.7
515.2
470.7
614.0
684.8
677.5
704.7
796.3
800.0
787.3
905.2
950.5
897.9
Insular Possessions
Virgin Philippines
Puerto
Islands
Rico
425.4
5.4
149.7
326.5
5.4
249.4
310.2
1.8
215.9
356.5
1.8
307.5
544.2
10.0
447.2
507.0
5.4
344.7
520.6
5.4
481.6
611.3
10.0
521.5
459.8
2.7
644.9
733.8
5.4
720.2
722.0
1.8
790.9
852.6
4.5
932.4
719.3
4.5
1132.8
Source: U.S. Congress, Committee on Agriculture (1962).
Foreign
Cuba
2349.1
4106.0
3107.4
3348.6
3558.2
3882.0
3310.6
2946.8
3763.1
2399.0
2251.2
1624.4
1426.7
Other
Total
202.3
48.1
171.4
94.3
29.9
39.9
26.3
29.9
25.4
48.1
25.4
10.9
36.3
4908.7
6173.9
5288.7
5861.9
6289.1
6370.8
6175.8
6068.7
6881.4
6061.5
6101.4
5716.8
5742.2
HS decomposition, 9/15/2005, 7:25:40 PM
36
Table 2: Cuban Exports, 1929-1932
sugar
sugar
US non-US
Export revenues ($ million US, constant
prices of 1926)
1929
174.2
50.1
1932
51.2
30.1
% change
-70.6
-39.9
Export volumes (000s metric tons, raw
sugar equivalent)
1929
3763.1 1083.0
1932
1624.4
956.8
% change
-56.8
-11.7
sugar byproducts
tobacco
other
13.1
4.2
-68.1
39.2
20.2
-48.5
17.5
13.0
-25.6
total
total
sugar exports
exports
224.3
81.3
-63.8
294.1
118.7
-59.6
4846.1
2581.2
-46.7
Sources: Zanetti Lecuona 1989; Anuario Azucarero 1959; International Sugar Council 1937; U.S. Congressional Committee on Agriculture 1962.
HS decomposition, 9/15/2005, 7:25:40 PM
37
Table 3: Accounting Decomposition of Cuban Exports, 1929-1932
sugar
sugar
US non-US
Sector shares in
exports (%)
1929
59.2
17.0
1932
43.1
25.4
Growth accounting decomposition of
sectoral contributions
Contribution (in
-41.834
-6.799
percentage points) to the
change in exports
contributed by each
sector
Percent share of change
70.1
11.4
in exports contributed by
each sector
Sources: See Table 2.
sugar byproducts
tobacco
other
total
total
sugar exports
exports
4.4
3.5
13.3
17.0
6.0
11.0
76.3
68.5
100.0
100.0
-3.023
-6.464
-1.525
-48.6
-59.6
5.1
10.8
2.6
81.5
100.0
HS decomposition, 9/15/2005, 7:25:40 PM
38
Table 4: Predicted counterfactual quantity effects, U.S. sugar market
Actual 1929
Actual 1932
predicted
counterfactual excluding Smoot-Hawley
counterfactual excluding price effect
unexplained
Source: author’s calculations
levels
6881
5717
5734
6072
6648
change % change % explained
-1165
-16.9
100.0
-1147
-809
-234
-18
-16.7
-11.8
-3.4
-0.3
98.5
69.5
20.1
1.5
HS decomposition, 9/15/2005, 7:25:40 PM
39
Table 5: Predicted Allocation of Reductions in Quantities Sold between Supplier Areas
Thousands of metric tons
Cuba Domestic
Difference between predicted
from actual 1929
Counterfactual excluding SmootHawley: including general
contraction and including price
effect
Combined effects: general
contraction, Smoot-Hawley, and
price effect
The combined effects, including
the effect of domestic expansion
Actual
1929
1932
absolute change
Source: See text.
US beet
US cane Pto. Rico
Hawaii
other
Total
941
21
0
6
#N/A
15
#N/A
962
1317
21
0
6
#N/A
15
#N/A
1317
1882
21
0
6
#N/A
15
#N/A
1903
3763
1624
-2139
2445
3145
699
988
1196
209
198
145
-53
460
853
393
800
951
151
-1772
-2197
-424
6881
5717
-1165
HS decomposition, 9/15/2005, 7:25:40 PM
40
Table 6: Supplier-Area Market Shares, the U.S. Sugar Market
Percent
Mainland
Beet
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
20.2
10.6
16.2
18.0
14.1
13.7
17.2
17.0
14.4
19.3
20.0
20.9
21.6
Cane
Hawaii
6.0
4.3
2.9
1.4
2.0
0.7
1.1
2.0
2.9
3.2
3.1
2.5
5.0
10.0
8.3
8.9
10.5
10.9
10.6
11.4
13.1
11.6
13.0
14.8
16.6
15.6
Insular Possessions
Virgin Philippines
Puerto
Islands
Rico
8.7
0.1
3.0
5.3
0.1
4.0
5.9
0.0
4.1
6.1
0.0
5.2
8.7
0.2
7.1
8.0
0.1
5.4
8.4
0.1
7.8
10.1
0.2
8.6
6.7
0.0
9.4
12.1
0.1
11.9
11.8
0.0
13.0
14.9
0.1
16.3
12.5
0.1
19.7
Source: U.S. Congressional Committee on Agriculture (1962).
Foreign
Cuba
47.9
66.5
58.8
57.1
56.6
60.9
53.6
48.6
54.7
39.6
36.9
28.4
24.8
Other
Total
4.1
0.8
3.2
1.6
0.5
0.6
0.4
0.5
0.4
0.8
0.4
0.2
0.6
100
100
100
100
100
100
100
100
100
100
100
100
100
HS decomposition, 9/15/2005, 7:25:40 PM
41
Table 7: U.S. Sugar Quotas (initial)
mainland beet
mainland cane
Hawaii
Puerto Rico
Virgin Is.
Philippines
Cuba
Other foreign
Sources: Wolf, Lynsky
Quota Act
1934
1550
260
971
843
4
1050
1949
27
Quota Act
1937
1633
443
989
841
9
1085
2014
28
Quota Act
1948
1848
513
900
934
6
290
3239
69
Quota Act
1951
1800
500
1052
910
6
782
2903
47
Quota Act
1956
1800
500
1052
1080
12
980
2809
117
HS decomposition, 9/15/2005, 7:25:40 PM
42
Figure 1. Cuban National Income and Exports
Cuban GNP and exports
160
140
Indices, 1937 = 100
120
100
GNP Alienes Real San.
GNP Santamaria Real San.
Exports Real San.
Sugar exports Real San.
80
60
40
20
0
1928
1929
1930
1931
1932
1933
1934
1935
Sources: Alienes Urosa; Santamaría García; Zanetti Lecuona
1936
1937
1938
HS decomposition, 9/15/2005, 7:25:40 PM
43
Figure 2. Nominal prices of sugar, New York, Cuban f.o.b. New York, and London
6
New York raws cif
NY Cubas cif + duty
cents per lb.
5
4
3
2
NY Cubas c&f
1
US sugar duty
London raws cif
London
NY Cubas
Sources: Journal of Commerce, London Times.
NY raws
NYCuba + duty
1/13/1938
1/13/1937
1/13/1936
1/13/1935
1/13/1934
1/13/1933
1/13/1932
1/13/1931
1/13/1930
1/13/1929
1/13/1928
1/13/1927
0
US duty
HS decomposition, 9/15/2005, 7:25:40 PM
44
Figure 3.
Distribution of Raw Sugar Production Costs by Suppler Area
11.000
10.000
9.000
8.000
7.000
6.000
5.000
4.000
3.000
2.000
0
10
20
Cuba
30
Beet
40
Louisiana
50
Pto Rico
60
Hawaii
70
80
Cuban with duty (1.7648 cts.)
Source: Data are from U.S. Tariff Commission. (1926). Note: unit costs are given in 1929 prices.
90
100
HS decomposition, 9/15/2005, 7:25:40 PM
45
Figure 4. Inframarginal Supply Curves for 1929.
Inframarginal Supply Curves, US domestic and Cuban
8.00
Jo
Do
7.00
Co
6.00
C1
cents per lb.
5.00
D1
J1
A
4.00
B
3.00
2.00
1.00
0.00
0.00
1000.00
2000.00
3000.00
4000.00
5000.00
6000.00
Sugar capacity (000s metric tons)
Source: See text.
joint witih duty (1.7648 cts.)
US mainland & insular possessions
Cuba (unit costs)
Cuba with duty (2 cts.)
Cuba with duty (1.7648 cts.)
7000.00
HS decomposition, 9/15/2005, 7:25:40 PM
46
Figure 5. Separation of the effects Smoot-Hawley, the price effect on ad valorem rates, and the general contraction
Inframarginal Supply Curves, US domestic and Cuban
12.00
Jo
Co
10.00
C3
J3
C2
J2
J1
C1
cents per lb.
8.00
6.00
4.00
2.00
0.00
0.00
1000.00
2000.00
3000.00
4000.00
5000.00
6000.00
Sugar capacity (000s metric tons)
joint witih duty (1.7648 cts.)
Cuba (unit costs)
HS increase with deflation
US mainland & insular possessions
joint with HS&Dep
no HS with deflation
Cuba with duty (1.7648 cts.)
const duty with deflation
7000.00
HS decomposition, 9/15/2005, 7:25:40 PM
47
Figure 6
Actual and Counterfactual Sugar Exports from Cuba to the United States, 1925-1961
4500
4000
3500
2500
2000
1500
1000
500
actual sales
actual initial quotas
counterfactual initial quotas
counterfactual final quotas
1
19
6
9
19
5
7
19
5
5
19
5
3
19
5
1
19
5
9
19
4
7
19
4
5
19
4
3
19
4
19
4
1
9
19
3
7
19
3
5
19
3
3
19
3
1
19
3
9
19
2
7
19
2
5
0
19
2
000s short tons
3000
HS decomposition, 9/15/2005, 7:25:40 PM
48
Figure 7
Actual and Counterfactual Cuban Real Earnings from Sugar Exports to the U.S.
350.0
300.0
$ millions
250.0
200.0
150.0
100.0
50.0
0.0
1925
1927
1929
1931
actual exports
1933
1935
1937
1939
actual initial quotas
1941
1943
1945
1947
counterfactual initial quotas
1949
1951
1953
1955
counterfactual final quotas
1957
19
25
19
26
19
27
19
28
19
29
19
30
19
31
19
32
19
33
19
34
19
35
19
36
19
37
19
38
19
39
19
40
19
41
19
42
19
43
19
44
19
45
19
46
19
47
19
48
19
49
19
50
19
51
19
52
19
53
19
54
19
55
19
56
19
57
19
58
$ millions, const $ of 1926
HS decomposition, 9/15/2005, 7:25:40 PM
49
Figure 8
Cuban National Income
1600
1400
1200
1000
800
600
400
200
0
Actual
Counterfactual
HS decomposition, 9/15/2005, 7:25:40 PM
50
APPENDIX 1: RESOURCE ABSORPTION INTO OTHER SECTORS
Was the decline in sugar production offset by increased production in other
sectors? There is no evidence of a significant absorption of resources into other sectors.
The strongest evidence is in relation to industrial production. Jorge Pérez-López has
constructed an index of industrial production that begins in 1930, which gives good
coverage of the most important industrial sectors in the Cuban economy of the time—
mining, food processing, brewing and beverages, tobacco products, textiles, and fishing.
Using his figures for industrial production, Table A.1 shows that overall industrial
production declined by 45 percent from 1930 to 1933. Only one industry showed an
increase—the fishing industry, in which production rose by 6 percent, but fishing was a
relatively unimportant activity in the Cuban economy.26
No adequate index of non-sugar agricultural production has yet been constructed,
but evidence can be collected for principal products, which shows that there was no
significant increase in production to reflect absorption of the release of two-thirds of the
resources formerly employed in the sugar industry. Table A.2 presents the evidence
collected. First, the second most important export industry, tobacco, saw a decline in
production of about 22 percent from 1927 to 1933. As noted in Table 1, the value of
tobacco exports fell from 1929 to 1933 by about 75 percent. The livestock industry was
one of the most important domestic industries, providing both food and a huge number of
draft animals for the sugar industry. Stocks of cattle, horses and asses declined, and
stocks of mules increased by 8 percent between 1927 and 1935. An index for livestock
slaughtered (a proxy for meat production) shows that meat production fell by 65 percent
between 1927 and 1933. Cocoa production and exports of timber fell.
Agricultural industries that show an increase in production were coffee and rice.
Coffee was not a major product in Cuba. An import-substituting tariff reform in Cuba in
1927 had stimulated domestic production of coffee, to compete with coffee imports.
Imports of coffee fell by about 8000 metric tons whereas production increased by only
26
Pérez-López (1977). Fish is not as important in the Cuban diet as its island location would lead one to
expect, so the fishing industry for food remained undeveloped. Cuba’s principal exports from the fishing
industry was sponge, which whose value increased from about $400,000 to $600,000 per year from 1929 to
the late 1930s Alvarez Díaz (1963), pp. 484, 684.
HS decomposition, 9/15/2005, 7:25:40 PM
51
about 3000 tons.27 Rice historically was an important part of the Cuban diet—the
principal grain staple in the country, yet it was almost all imported. It is believed that the
Cuban tariff of 1927 also stimulated rice domestic production, yet from 1921-25 to 193640 rice production only increased on average 1.1 percent per year.28 If the entire increase
of both coffee and rice were assigned to the period 1929 to 1933, it still amounts to a total
increased value of under $1.7 million per year (1926 US dollars), which does not
compare favorably with the $167 million per year in lost sugar export revenues.29
Other food crops seem to have met with similar fates. The Commission on Cuban
Affairs estimated that imports of maize, which had declined to almost nothing by 1931
(arguably because of the 1927 Cuban tariff), rose to over 8 million lbs. in both 1932 and
1933.30 The data available do not account for increased food production for subsistence.
Unemployed and underemployed workers likely made ends meet gardening for
subsistence. It was customary on some sugar cane estates to permit permanent workers
to cultivate gardens in the fire lanes between cane fields during the dead season.31 It is
probable that more estates adopted this custom as conditions worsened. However, the
cane fields themselves were not made available—only the fire lanes—because each year
any uncut cane could be left standing and cut the next year without loss of value, if the
price of sugar should improve. In fact, both capital and land resources were tied up in
industry-specific investments—cane fields, mill and railroad equipment—which was not
physically transferable to other sectors. Labor was released, but without accompanying
complementary inputs. The masses of unemployed would have produced what they
could to survive. Much of this production does not appear in the figures presented. But
27
These figures for the coffee industry are taken from Alvarez Díaz (1963), pp. 486-87, 689; see also Soto,
p. 298. The Foreign Policy Association’s Commission on Cuban Affairs, a team of social scientists
commissioned by President Mendieta in 1934, concluded that between 1925 and 1933 coffee imports fell
by 5900 metric tons, domestic production of coffee increased by about 1800 tons, resulting in a net decline
of coffee consumption of 4100 tons. Foreign Policy Association (1935), p. 58.
28
The Foreign Policy Association, Commission on Cuban Affairs claims that between 1925 and 1933, the
increase in rice production was 26 percent of the decline in imports. Foreign Policy Association (1935), p.
58.
29
In this estimate, coffee is valued at $0.12 per lb. and rice is valued at $0.05 per lb. The prices are
estimates for 1933 taken from Alvarez Díaz (1963), p. 689, and Foreign Policy Association (1935), p. 78.
To make them comparable with other figures reported, they are deflated to 1926 prices using the BLS
wholesale price index.
30
Foreign Policy Association (1935), p. 58.
31
The dead season lasted from June through November or December. Grinding took place between
December and June.
HS decomposition, 9/15/2005, 7:25:40 PM
52
that production also represents a consequence of the crisis, not to be mistaken for a
healthy substitution of resources out of sugar. One must conclude that the resources
released from the sugar industry after 1930 did not serve to stimulate the other sectors of
the economy.
HS decomposition, 9/15/2005, 7:25:40 PM
53
Table A.1
Non-sugar industrial production
Index of non-sugar industrial production
Sectors:
mfg
mining
elec & gas
fishing
Index of sugar and its by-products industrial
production
Index
Index
(1953-100) (1953-100)
1930
1933
34.0
22.0
34.3
40.4
26.3
68.6
91.57
20.3
27.8
20.6
73.1
39.36
Rate of increase
(percent)
annual average
-14.5
Index for end year
(1930 = 100)
1930-33
64.8
-17.5
-12.5
-8.1
2.1
-28.1
59.2
68.8
78.4
106.6
43.0
Source: Perez-Lopez, Jorge F., "An Index of Cuban Industrial Output, 1930-1958." p. 52.
HS decomposition, 9/15/2005, 7:25:40 PM
54
Table A.2
Non-sugar Agricultural Production
Products:
Tobacco
Tobacco prod., en rama equiv. (million lbs.)
Livestock (000s head)
cattle
horses
mules
asses
Livestock slaughtered (millions kg)
cattle (millions kg)
hogs (m kg)
sheep & goats (m kg)
Index of livestock consumed (1927=100)
Coffee
(000s tm)
(millions of pesos)
Cocoa
(millions lbs.)
Rice
(millions lbs.)
Wheat
(millions lbs.)
Maize
imports of (millions lbs.)
Timber, exports of
(000s pesos)
Years:
Period
1929
96.4
1927
4785.9
759.3
73.5
3.5
1933
37.8
1933
4657.0
599.0
80.0
3.0
67.6
9.2
0.3
100.0
1929
20.6
9.4
27.0
2.7
0.1
106.6
1933
23.7
6.1
1925-26
8.8
1921-25
35.0
1927
0
1925
1.3
1927
920
1933
0
1933
8.4
1921/30-37
Index of
Avg.
Imputed
end-year index for
annual rate
of increase (beg.-year 1933 (1929
(percent)
= 100)
= 100)
-23.4
39.2
34.4
1927-35
1927-35
1927-35
1927-35
-0.3
-3.0
1.1
-1.8
97.3
78.9
108.9
86.6
98.6
88.7
104.3
93.0
1927-33
1927-33
1927-33
1927-33
-15.3
-20.3
-21.3
1.1
39.9
29.6
27.9
106.6
51.5
40.4
38.4
104.4
3.5
-10.8
114.8
65.0
114.6
63.4
-1.7
84.6
93.5
1.1
118.6
104.6
0
--
--
-10.7
34.5
63.7
1931-40
29.2 1929-1933
1929-1933
1935-36
7.4 1925/26-35/36
1936-40
41.5 1921/25-36/40
1927-33
1935-39
0.2
1935-39
317 1927-35/39
Sources: Álvarez Díaz (1963), pp. 478, 486-90, 679-90; Commission on Cuban Affairs (1935), pp. 56-58; Soto 1979, pp. 297-98.