Tariffs are Donald Trump’s obsession, this would not be the first time he has tinkered with international trade in an incendiary fashion. The U.S. President regularly proclaims that “tariff” is his favorite word. He uses it as a cudgel and a pawn on the board as he negotiates with other countries. As the U.S. gets ready to roll out its own plan on April 2, the past begins to haunt with questions about effectiveness. Does this approach really put American consumers first?
Tariffs have always been a politically controversial club in policy, but one that lots of prestigious experts have warned us against over the years. Economist Susan Stone explains that this is often the case because tariffs are ineffective. She further adds that they are disproportionately inequitable to individual consumers. The U.S. historical context of tariffs paints a complicated picture. Here, environmentalists, public health advocates, business interests and the economic ripples are felt across the country. Unemployment.
Historical Context of Tariffs
The Smoot-Hawley Tariff Act of 1930 is a painful reminder that high tariffs can kill an economy. Signed by President Herbert Hoover, the law placed a 25 percent tariff on between 800 and 900 imports. Economists, including our very own Susan Stone, dispute this act’s role in making it one of the major reasons for spreading the Great Depression across the world.
“The Smoot-Hawley Tariff Act is believed to have precipitated the Depression across the global economy.” – Susan Stone
After its passage, global trade between countries almost completely stopped, deepening economic pain around the globe. This historical lesson serves as a warning against the perils of punishing high tariffs. It illustrates how these policies can create unintended consequences.
In the 1920s, American farmers lobbied fiercely for import tariffs to shield their industry from international competition. The U.S. government quickly reversed its position on tariffs. This change marked the beginning of many later clashes between the principles of protectionism and free trade.
Trump’s Tariff Policies
In recent years, Donald Trump has taken aggressive steps in tariff policy, imposing tariffs of 25 percent on imports from Canada and Mexico. He also implemented similar tariffs on steel and aluminum imports, which affected products from allies—Australia, for instance. In addition, Trump promises that these tariffs will bring in trillions in revenue and create a jobs boom the likes of which America has never seen.
“We let Japan come in and dump everything right into our markets, it’s not free trade,” – Donald Trump
As we hear from experts like Susan Stone, these kinds of proposals usually just end up making things more expensive for consumers. She highlights that tariff increases can levy tax raises on domestic goods too.
“Overall, all car costs increased, so the consumer lost out.” – Susan Stone
Stone warns that sheltering domestic industries can create a dependency on tariffs, sapping their competitiveness in the long run. She insists that even if the original goal is to boost local economies, it usually does so more harm than good over time.
“We generally frown upon protecting domestic industries because we find that over time, they just become dependent on the tariff.” – Susan Stone
Economic Implications of Tariffs
In addition to raising the prices of goods, the economic effects of tariffs can ripple into larger market trends. The Bretton Woods system, established in the 1940s to stabilize exchange rates and promote growth, began to unravel in the 1970s. In 1971, the U.S. completely erased the dollar’s link to gold. This surprising decision led to a lost decade marked by both inflation and increasing unemployment.
Specialists are sounding alarms that today’s tariff tactics are a repeat of history’s blunders. Douglas Irwin, no less, characterizes such unilateralist approaches as “beggar thy neighbor” policies. Countries can and will restrict trade when it suits their interests, but ultimately do so at great peril.
“It’s what’s known as a ‘beggar thy neighbour’ policy, where everyone is cutting off trade, and everyone’s trade goes down.” – Douglas Irwin
According to historian and economist Brian Domitrovic, protective tariffs tend to coddle domestic industries, making them less competitive on the world stage. He meditates on how these historical trends serve to underline the belief, useful to isolationists, that pro-isolationist policies can have pernicious long-term effects.
“It coddles your own industry and makes your industry much less competitive with the rest of the world.” – Brian Domitrovic
The Future of Tariffs in America
As April 2 nears, the U.S. prepares to follow through on its reciprocal-tariffs plan. Under this plan, we’ll hit our imports with the same kind of taxes that those other countries are slapping on our exports. To this end, Trump boasts with extreme confidence that his aggressive tariff policies will usher in a new economic prosperity. Most critics are still not buying his claims.
Yet as Stone goes on to explain, there are far better strategies for raising revenue that don’t fall more heavily on lower-income consumers.
“If you want to raise revenue, there are better ways to do it… because they’re very regressive.” – Susan Stone
Each of these policies will have major impacts over time. We’ll find out soon enough whether they embody the lessons of history, or merely prefigure new economic perils for American taxpayers.
