“Tariffs…the most beautiful word in the dictionary.” – Donald Trump
On Wednesday, April 2, Donald Trump fulfilled one of his most fervent campaign promises: In an elaborate Rose Garden ceremony, he held up a large board on which our trading partners and the tariffs to be levied in each were listed. “Liberation Day” (his words) had arrived. We in the U.S. no longer would be played for suckers, and above all else, manufacturing jobs soon would be flooding back to the U.S. because goods produced in the U.S., of course, would be exempt from tariffs.
Tariffs are seductive for several reasons, two of which stand out. First, tariffs protect domestic industries. Foreign goods suddenly cost more, and domestic industries, therefore, can grow, add jobs, pay taxes, etc., unimpeded by offshore or cross-border competition. And second, tariffs mean extra revenue for the government coffers. The problem is, the enactment of tariffs does not take place in a vacuum. Other countries see what’s happening and retaliate with their own tariffs. The risk is that, net-net, aggregate trade taking a dive and everybody suffers. Ivory tower theory? No. Unfortunately, there are many precedents; one stands above all others.
The year is 1929. The U.S. was sliding into recession, and Senator Reed Smoot of Utah decided to do something about it. The problem, as he saw it, is that too many countries were selling too many goods to U.S. companies, thereby undermining the lives of too many hard-working Americans. The solution: Hike tariffs on over 20,000 goods an average of 59%. Smoot may have been able to get this done by himself, but he wisely enlisted the help of a legislator partner, Representative Willis Hawley of Oregon, head of the powerful House Ways and Means Committee. And since the U.S. basically was still a one-party country (there were only two Democratic presidents between Buchanan and FDR), President Hoover’s signature was pretty much a foregone conclusion. Despite a last-minute appeal by over 1,000 American economists not to sign (and Hoover’s own misgivings), the foul deed was done. Smoot-Hawley became the law of the land.
The timing could not have been worse. For decades, economists have argued about what caused and then perpetuated the Great Depression. But the two factors that always are in the conversation are the SH tariffs and the Fed allowing the nation’s money supply to collapse by 30% between 1929 and 1933. The former stifled international trade when more international trade is exactly what the worldwide economy needed, and the second had a profound effect on liquidity, Keynes’ “slick pavement” upon which all commerce is transacted. The irony: Both Reed Smoot and Willis Hawley were swept out of office by the Democratic landslide of 1932.
Therefore, in terms of scope, the Smoot Hawley tariffs are the precedent for what Donald Trump et al. laid out in the Rose Garden ceremony. That’s not to say that Depression 2.0 is on the way – again, at least one other major factor, probably never to be repeated, was involved in 1.0. But the Trump tariffs will stifle international trade, exert upward pressure on prices everywhere, and have other consequences that, frankly, are unknowable. In other words, playing with fire is an expression with some applicability.
On the other hand, the international trade playing field has not been level in decades, and, for a number of reasons, we in the U.S. have accepted a large, net-net disadvantage. Unimpeded globalization may be every economist’s ideal, but the real-world outcomes for us in particular have been far from ideal. The tariffs levied by others on our goods and services have dwarfed anything we have done, and the bleeding of so many manufacturing jobs has produced shuttered plants and economic hardship throughout the country. The Trump people say that something finally had to be done and that the only way to get something done in this divided land is to go after the problem at 100mph rather than 50 mph.
So, temporary pain for long-term gain, i.e., a fundamental fix to inequities we’ve put up with for a long long time? How long is “temporary,” and what does that fundamental fix actually look like? What is the endgame, i.e., punishing those who have been taking advantage of us or getting them to the negotiating table?
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These are important questions to be answered. Here’s another: Will trading partner pressure and stock market turbulence force Donald Trump et al. to back off unilaterally. We’re guessing no, but Smoot Hawley is a sobering precedent even though the motivations and circumstances were different.
“Tariffs…the most beautiful word in the dictionary.”
-Donald Trump