Do tariffs work, and what is Trump trying to do? It’s not advisable to try and second-guess such an unpredictable man, but his role model also presided over a high-tariff regime designed to protect domestic American industries.
In his inaugural address, Trump harked back to William McKinley, the 25th US president, who was in office from 1897 until he was assassinated in 1901. The McKinley tariff protection era in the US lasted from 1890 to 1920. A century later, another Republican US president, who has called tariff “the most beautiful word in the dictionary”, seems determined to throw away the painful lessons from history.
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“I will, very simply, put America first… America will soon be greater, stronger, and far more exceptional than ever before… America will be a manufacturing nation once again… I will immediately begin the overhaul of our trade system to protect American workers and families. Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens… President McKinley made our country very rich through tariffs and through talent … The American dream will soon be back and thriving like never before. … The future is ours, and our golden age has just begun,” Trump said at his inauguration.
The rise of US protectionism
Brief histories of the tumultuous McKinley era are available from the Senate Historical Office and the Office of the Historian, Foreign Service Institute, United States Department of State. Before Mckinley became president, he was chairman of the House of Representatives’ Ways and Means Committee. The McKinley Tariff Act of 1890, which proposed increasing average tariffs on imports into the US from 38% to 50%, was under his chairmanship.
The idea was to give fledgling industries temporary protection so that they would eventually get better and more efficient. Costs would go down, and they would become internationally competitive over time.
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McKinley’s tariff protection helped develop some of America’s infant industries, but had its flaws, too. America’s steel industry, which had struggled to compete against British supremacy, expanded under the McKinley tariffs. The American glass and tinplate industries also turned the tide.
Economists differ over how much McKinley’s tariff protection helped develop instant American industries. Some say the tinplate industry, for instance, would have flourished eventually, even in the absence of McKinley’s tariffs. Tinplate needs iron and steel, and the high tariffs on imported iron and steel made it expensive. Costs eventually came down as less expensive iron ore became available from the new range in Minnesota.
Risky business
Tariffs are usually inflationary and cause unintended disruptions and harm. McKinley’s tariff plan lacked appropriate guardrails against inflation and potential trade wars. For instance, rising costs of goods and equipment began hurting farmers. The ensuing voter backlash saw McKinley and other Republicans lose their seats in elections two years later. McKinley returned to Congress in 1896. On becoming president, his thinking changed.
Drawing parallels between Mckinley’s and Trump’s tariff plans is also difficult because there was no personal or corporate income tax at that time. Nor could exporting countries fall back on currency manipulation.
In the elections of 1910 and 1912, the free-trade supporting Democrats got a majority in Congress, paving way for an end to McKinley’s protectionism. Congress passed the Underwood-Simmons Tariff of 1913 that lowered tariffs and instituted an income tax.
Back with a bang
But this pushback against high tariffs was short-lived.
Republicans regained control of Congress during the First World War and in the 1920 election, and enacted laws that raised tariffs above the level set in 1913. In 1921, Congress passed the temporary Emergency Tariff Act. In 1922, it passed the Fordney-McCumber Tariff Act for providing protection to American farmers and industries whose wartime markets were now disappearing. It was a particularly tough time for farmers. Overproduction during the 1920s had depressed prices of their produce.
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Herbert Hoover, the Republican presidential candidate in the 1928 election, promised even higher tariffs to help US farmers. He became president at the onset of the Great Depression and subsequently signed the Smoot-Hawley Tariff Act in June 1930.
This bill aimed to provide protection to farmers, but businesses and industries started petitioning for relief. The scope of the tariff broadened, and it ended up deepening protectionism in the US. Other countries imposed retaliatory tariffs in response, which reduced global trade and economic growth. The average tariff on imports to the US increased from 40% in 1929 to 60% by 1932. World trade declined 66% between 1929 and 1934.
The Smoot-Hawley Tariff Act is sometimes blamed for causing the Great Depression. But not all economists agree that its tariff protection was the sole reason for the recession. But there’s consensus that by inviting retaliatory tariffs from other countries, the Smoot-Hawley Tariff Act ultimately froze global trade. Although not necessarily a cause, it did prolong and deepen the Great Depression.
Rekindling global trade
In 1932, the Democrats regained a majority in both houses, and Reed Smoot and Willis Hawley were voted out. At last, the US decided to give up protectionism.
In 1934, Congress passed the Reciprocal Trade Agreements Act, giving President Franklin D. Roosevelt authority to negotiate reciprocal tariff reductions with other countries – in a bid to rekindle global trade during the Great Depression.
Washington signed reciprocity agreements with other countries between 1935 and 1941, bringing to an end its policy of imposing universal tariff. The US continued to drop its tariffs after World War II and especially with the setting up of the World Trade Organisation. Its trade negotiators offered relief from tariffs to other countries. Over time, US tariff levels dropped to 5%.
Why tariffs are no silver bullet
The traumatic experiences of the 1930s served as a cautionary tale against tariff hikes for a whole generation of Republicans and Democrats in the post-war era. This era of rising globalisation saw global trade and economic growth and drop in poverty levels across countries.
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But of late, resentment has been growing in the US against the unilateral tariff-free trade policies that lowered prices for American consumers. American companies took advantage of the low tariffs to build global supply chains by shifting swathes of production out of the US to low-cost manufacturing countries, especially China. Their cost savings and profits shot up. The US de-industrialised and American workers lost jobs and wages.
The deepening disparities have bred resentment. Europe has suffered similarly. A political consequence is the rise of populist, nativist leaders across the advanced world. Tariffs are no silver bullet for correcting these real and undeniable imbalances.
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