The Long Game of Tariffs: History Meets Today’s Trade Turmoil
What are tariffs?
Tariffs are as old as trade itself. In the United States, they began with the Tariff Act of 1789, signed by George Washington, which imposed a modest 5% tax on imports to fund the fledgling government and shield domestic producers. For more than a century, tariffs were a primary revenue source, peaking in the 19th century (when they often exceeded 20% on dutiable goods).
JP Morgan’s Michael Cembalest recently noted that the McKinley Tariffs, while very popular when they were enacted in the late-1800s, almost immediately spiked inflation and proved disastrous for President William McKinley:
Voters were very unhappy: a few months later, the GOP lost 100 seats in the 1890 midterm elections. The GOP loss in 1890 is the third largest in the history of the House going back to the Civil War.
Another infamous chapter in the tariff story came with the Smoot-Hawley Tariff Act of 1930. Initially designed to protect American farmers and manufacturers at the onset of the Great Depression, it raised average tariffs to 20%, with some rates hitting 50%. The result? Retaliatory trade barriers from Europe and Canada slashed global trade by more than 60% within three years, deepening the economic crisis.
William Bernstein’s book A Splendid Exchange proves helpful in highlighting the ramifications of such tariff actions:
All over the world, for three years after the passage of Smoot-Hawley in 1930, French lace, Spanish fruit, Canadian timber, Argentine beef, Swiss watches, and American cars slowly disappeared from the world’s wharves. By 1933 the entire globe seemed headed for what economists call autarky–a condition in which nations achieve self-sufficiency in all products, no matter how inept they are at producing them.
As well as the outcome:
Between 1930 and 1933, worldwide trade volume fell off by one-third to one-half. Depending on how the falloff is measured, this computes to 3 to 5 percent of world GDP, and these losses were partially made up by more expensive domestic goods.
The U.S. shifted gears after World War II, and the General Agreement on Tariffs and Trade (GATT) in 1947, followed by the World Trade Organization (WTO) in 1995, ushered in an era of freer trade. Tariffs dropped steadily—by the late 20th century, the U.S. average effective rate hovered below 5%. This globalization fueled economic growth but left some industries exposed, setting the stage for today’s tensions.
Will tariffs bring back manufacturing and jobs to America?
No. Economist and author Cullen Roche explains:
Manufacturing has fallen from 40% to 7% of U.S. employment since 1950, and robotics will decimate the remaining 7% in the next 50 years. Those jobs aren’t coming back, and trying to turn the most advanced technological economy in the world back into an emerging market manufacturing economy is backwards thinking… Americans will have fewer choices because the government reduced competition and consumer options. This will drive UP prices, especially when U.S. firms realize they have more pricing power due to the government’s manipulation of the market.
Even if you agree with tariffs as a policy idea, the implementation here has been terrible. It’s not feasible to expect global corporations or small businesses to change their supply chains and manufacturing capabilities on the fly like this. It simply can’t be done overnight. It’s economic suicide.
Based on the White House’s numbers, businesses will pay upwards of 40%, 50%, or maybe 60% in tariffs. Corporations will try to cut costs like crazy, which means lots of layoffs are likely coming. This is not sustainable. The hope is that there will be negotiations and that these rates will come down drastically. If they don’t, a recession is inevitably the baseline expectation in a trade war like this.
Brant Jones, CFP®