As the US deploys tariffs as economic weapons — the story of how a 1930s trade policy accidentally abolished penal sanctions in the Dutch East Indies reveals unintended consequences
Budiman Minasny
On 2 April, in a single strike the United States imposed tariffs on all products entering the US market, with Indonesia facing a hefty 32 per cent tariff. Trade tariffs between the US and Indonesia have evolved over time, influenced by trade agreements, disputes, and economic policies.
The Smoot-Hawley Tariff Act of 1930 stands as one of the most controversial economic policies in American history. Designed to protect domestic industries during the Great Depression, its steep import taxes triggered retaliatory tariffs worldwide and deepened the global economic crisis. Less discussed was an unexpected moral clause — Section 307 — that would ultimately help dismantle one of colonialism’s most brutal labour systems in the Dutch East Indies (modern-day Indonesia).
At the heart of the Smoot-Hawley Act was Section 307, which states:
'All goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in any foreign country by convict labor or/and forced labor or/and indentured labor under penal sanctions shall not be entitled to entry at any of the ports of the United States, and the importation thereof is hereby prohibited ...'
In the 1920s, tobacco leaf from the plantations of Deli, Sumatra was in high demand as a wrapper leaf, with the U.S. importing about 40,000 bales annually. It was subjected to various tariffs. The Republican party advocated for the protection of American industries through the use of tariffs on products such as sugar, tobacco, rice, vanilla, sisal, coffee, and pineapples. Connecticut and Florida tobacco farmers lobbied aggressively to ban Deli tobacco, arguing that it undercut domestic wrapper leaf production.
The hidden labour clause that shook colonial empires
In 1929, Republican Senator John J. Blaine from Wisconsin, discovered the penal sanction used by tobacco companies in Sumatra. He described it as a moral imperative to combat slavery-like conditions abroad and protect American workers from unfair competition. As a result, an amendment was added to the Smoot-Hawley Tariff Act. Instead of raising tariffs, Blaine aimed to stop the import of Deli tobacco altogether by including a clause that banned commodities produced through forced or indentured labor.
Its implementation faced immediate challenges. Powerful American corporations like Goodyear and U.S. Rubber operated vast plantations in Sumatra, relying on indentured labour to produce rubber — a commodity the U.S. couldn’t produce domestically in sufficient quantities. A further amendment was added with an exception based on ‘consumptive demand’ a loophole that significantly weakened the ban, but its symbolic impact resonated across colonial empires. The Smoot-Hawley Tariff Act, including Article 307, was passed in June 1930, and was set to take effect on 1 January 1932. It included an exception: if the U.S. could not produce enough of a given product domestically, imports would still be allowed.
The brutal reality of Sumatra’s plantation system
In the Dutch East Indies, the Deli Tobacco Planters Association had perfected a system of labour coercion through the Coolie Ordinance or Koelieordonnantie in 1880. Workers from China and Java were recruited through deceptive practices, often not understanding the multi-year contracts they signed. Once on Sumatra’s tobacco and rubber plantations, they found themselves trapped in a system of penal sanctions — colonial laws that criminalised any breach of labour contracts.
Workers who attempted to escape, refused orders, or even complained about conditions faced imprisonment, corporal punishment, or forced return to the plantations. European planters justified these measures as necessary for maintaining discipline, but in practice, they created a state-sanctioned system of debt bondage that differed little from slavery.
Economic crisis
The Great Depression created a perfect storm for reform. The market crash in October 1929 saw a collapse in global demand for plantation goods. East Sumatra’s workforce was slashed from 336,000 in 1930 to just 160,000 in 1936. This economic upheaval coincided with growing international pressure — not just from the U.S. tariff provision, but also from the International Labour Organisation’s 1930 Forced Labour Convention.
The Dutch colonial administration found itself caught in an increasingly untenable position, torn between harsh economic realities and growing international condemnation of its coercive labour system. For decades, the penal sanctions regime had faced criticism within the Dutch East Indies’ own legislative body, the Volksraad in Batavia, where reform-minded members had repeatedly challenged the system. The colonial government, heavily influenced by powerful plantation interests, consistently resisted these calls for change.
In an attempt to negotiate exemptions from Section 307’s provisions, representatives from Sumatra’s influential Deli tobacco industry travelled to the United States in early 1930 for talks with the Department of Trade. Their efforts proved unsuccessful. Faced with the imminent threat of losing access to crucial American markets and recognising the shifting international consensus against forced labour, the Deli planters made a strategic retreat.
To pre-empt a U.S. ban, in October 1930 the Deli Tobacco Planters Association announced that they would switch to free labour. They would also remove the penal sanction and committed to reducing the number of labourers under coolie ordination contracts by fifty percent by 1936. On 2 November 1931, the U.S. Treasury ruled that domestic wrapper leaf was insufficient in quality and quantity, thereby allowing Deli tobacco imports to continue.
On 1 January 1932, the Deli tobacco companies ‘voluntarily’ declared that they would remove penal sanction. The tobacco companies abandoned penal sanctions not out of moral conviction, but as a pragmatic response to these converging pressures. Although economically motivated, this voluntary renunciation marked the beginning of the end for one of colonialism’s most notorious labour systems.
From colonial oppression to wartime abolition
The final death knell for the Coolie Ordinance came through a combination of international diplomacy and wartime necessity. In 1933, the Netherlands ratified the ILO’s Forced Labour Convention and the 1939 Penal Sanctions Convention specifically targeted colonial labour abuses. The Dutch finally repealed the Coolie Ordinance in late 1941, while allowing current contracts to continue. Just before the Japanese invasion of the Dutch East Indies in March 1942, a law regulating migrant labour was passed, making way for the complete abolition of the penal sanction.
The Smoot-Hawley Tariff rightly remains criticised for its catastrophic economic consequences. Its forgotten labour clause demonstrates how trade policy can sometimes produce unintended moral consequences. By making market access contingent on labour practices, Section 307 helped accelerate the demise of a cruel colonial labour system.
In the current economy, America's trade wars are likely to exacerbate the struggles of Indonesian workers. Many manufacturing factories in Indonesia are already closing due to rising costs, cheap imports, declining market demand, and financial difficulties, leading to significant job losses in the manufacturing sector. The tariffs will further jeopardise Indonesian textile, apparel, and furniture exports to the U.S., reducing competitiveness, squeezing profit margins, and impacting workers. The tariffs will also cause the prices of oil palm, rubber, and other products to drop, adversely affecting many smallholder farmers and workers who rely on these industries for their livelihoods.
Budiman Minasny is a Professor of Soil Landscape Modelling at the University of Sydney with an interest in Indonesia colonial history.
