The steep import tariff hikes promised by the incoming administration, if imposed, are likely to play out just like protectionist policies of the past – by redistributing income to favored industries from less favored ones and stunting economic growth.
Here are four clear takeaways from the history of American trade policy:
High tariffs have always reduced American exports as well as imports.
- High tariffs on imports leave foreigners with fewer dollars to buy U.S.-made goods.
- They move labor and resources away from industries in which the United States is a net exporter into industries in which it’s a net importer. In the late 19th century era of very high tariffs, this meant that U.S. exporters faced far higher input costs that lowered their exports, employment, and profits.
- Other countries usually retaliate against the United States with higher tariffs of their own. Tit-for-tat retaliation in the 1930s contributed to the Great Depression when dozens of countries raised tariffs in response to America’s highly protectionist Smoot-Hawley Tariff.
In the Gilded Age after the Civil War, export-oriented businesses – above all, in the agriculture sector – lost more from high tariffs than import-competing industries like iron and steel gained, Dartmouth College economist Douglas Irwin shows in his 2018 book Clashing Over Commerce: A History of U.S. Trade Policy. High steel tariffs directly constrained the growth of the U.S. shipbuilding industry. And American exports fell more than imports in the wake of Smoot-Hawley.
The takeaway: High tariffs ship the jobs of people working in export-focused industries overseas.
Almost all tariff policy debates have pitted business interests against each other – those that aim to profit from higher tariffs versus those that stand to lose out.
- Agricultural interests, representing America’s largest exporting sector in the 19th century, consistently opposed the era’s high tariffs, which the Northeast’s import-competing manufacturers demanded.
- Firms that import intermediate goods and turn them into finished products have typically opposed higher tariffs. For example, steel companies have long demanded tariffs on imported steel, but industries that buy steel – like producers of household appliances and globally integrated auto makers – have mostly taken the other side, in past centuries and today.
- Labor unions, perhaps surprisingly, have generally taken a neutral stance on tariffs, except during a brief recent period. This reflects three considerations:
- Union members suffer from high tariffs as consumers.
- Owners of protected firms reap most of the benefits of protection, not ordinary workers.
- Many union members work for firms that lose out from high tariffs.
Trade policy debates are often “a strife of interests masquerading as a contest of principles,” the author Ambrose Bierce wrote in his satirical book The Devil’s Dictionary. Nineteenth century Congressmen like Rep. William “Pig Iron” Kelley became notorious for relentlessly serving the interests of specific industries. “He thinks tariff, talks tariff, and writes tariff every hour of the day, [and] mumbles it over in his dreams during the night,” a colleague said of him.
The takeaway: Tariffs are mostly about redistribution to politically well-connected interests.
U.S. leaders advocating for low tariffs have nearly always been pragmatic politicians who recognized reasonable exceptions to open trade, rather than the ideological rigid “free traders” that trade critics often deplore.
- In the early years of the nation, Presidents George Washington and James Madison called for self-reliance in goods vital to national defense. Madison and Treasury Secretary Alexander Hamilton believed it was reasonable to protect “infant industries” with large potential spillovers to other industries for a limited time, until they grew up and could thrive without protection. But many well-connected firms continued to cite this argument long after joining the ranks of the world’s largest enterprises, President Grover Cleveland, who served in the 1890s and 1990s, later wryly noted.
- Every president from World War II to the early 21st century – from Franklin D. Roosevelt to George W. Bush – worked toward negotiated reductions in tariffs and nontariff trade barriers around the world. But they also used restrictive measures to press trading partners that weren’t fulfilling their obligations. The result: a dramatic decline in trade barriers in virtually all major trading nations, which contributed to the greatest period of rising living standards that America or the world has ever seen.
The takeaway: Pro-trade leaders throughout U.S. history have advanced the interests of American firms and workers – with spectacular results for the American people.
High tariffs didn’t contribute significantly to U.S. industrialization – and they may have held it back.
- Manufacturing industries, Doug Irwin shows, grew just as fast between the 1830s and 1850s – a period of falling tariffs – as they did during the late 19th century Gilded Age, contrary to a common narrative that credits high 19th and early 20th century tariffs for the rise of American industrial power. Protectionists crediting high tariffs for U.S. industrialization get their timing wrong.
- U.S. manufacturing grew at record rates during the post-World War II years when tariffs fell most rapidly, from the late 1940s through the 1960s.
- High steel tariffs in the late 19th century likely slowed the growth of steel-using industries like shipbuilding.
- In the decade after 1945, import protections failed to sustain America’s position in the industries it was primarily designed to save: textiles, footwear, and metals.
The takeaway: High tariffs haven’t contributed significantly to America’s prosperity in the past and are not likely to do so in the future.
Throughout American history, the best path for expanding opportunity and raising living standards has been building world-leading companies that outperform their competitors without protection – not redistributing income from some industries to others through tariffs and other barriers.
