Any high school history teacher could tell Trump why tariffs don’t work
The Trump administration has elevated a tariff policy to be the centrepiece not only of its international economic policy but also those areas that normally fall under national security.
The tariff instruments are to be applied to drive home American arguments on trade and investment, regardless of whether the countries concerned are long-time US friends or even allies, more so than nation-states normally regarded as adversaries.
Across the board, American strategic interests from the Panama Canal to Greenland have been subject to threats of American tariffs being imposed on the countries concerned (Panama and Denmark) unless US demands on sovereignty are met.
Donald Trump appears to assume that tariffs will always work in favour of US taxpayers. But is this the case? Have we learnt nothing from the experience of the Depression?
It is quintessentially American for the historian of the US Senate to relate the politics of the Depression to more recent American culture. Specifically, the passage of the Smoot-Hawley Tariff Act makes an unlikely appearance in the classic 1986 comedy film Ferris Bueller’s Day Off.
This historian referred to the scene where the teacher stumbles about the classroom trying to encourage an answer from his silent charges.
His desperate search for engagement becomes laughable as he prompts: “In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the – Anyone? Anyone? – the Great Depression, passed the – Anyone? Anyone? – The tariff bill. The Hawley-Smoot Tariff Act, which – anyone? Raised or lowered?– raised tariffs, in an effort to collect more revenue for the federal government. Did it work? Anyone? Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression.”
Ferris Bueller’s Day Off is a satire and the characters are fictitious.
Senator Reed Smoot (Republican, Utah) and Representative Willis Hawley (Republican, Oregon) were not. The legislation they promoted, based on increased tariffs, brought havoc to the global economy during the Depression.
They championed a tariff of about 20 per cent to apply to foreign goods imported into the US and that took effect from the American summer of 1930.
Overall, the average American tariff rose to a formidable 45.4 per cent.
It captured the mood of the time, just as Trump’s invocation of the magic word tariff is sweeping populist America now.
The Trump administration seems to regard tariffs as a panacea. Witness this declaration by the President to the great and good at Davos: “Come make your product in America and we will give you among the lowest taxes as any nation on earth. But if you don’t make your product in America, which is your prerogative, then very simply you will have to pay a tariff.”
The problem with this is that tariffs ultimately are paid by the domestic consumer, and tariffs on Chinese, Mexican or Canadian goods will be paid by customers in Detroit, Austin or Seattle.
This is punitive policy, pure and simple. What is worse is the experience of history tells us definitively that it is ultimately disastrous.
The even greater problem for those who rely on tariffs as revenue measures is that other countries respond in kind.
In the case of Smoot-Hawley, 18 US trading partners replied to the American protectionism with similar measures of their own.
World trade declined, with European exports falling by two-thirds. The Depression deepened and lasted far longer than it should have done.
Republican president Herbert Hoover understood this instinctively. He was a free-trader at heart but the pressure on him from his own party forced him to sign the Smoot-Hawley Tariff Act into law. This was a disaster.
This is what we are playing with now in terms of a tariff hand grenade rolling around the table.
Threats by the Trump administration to apply tariffs to any diplomatic or political situation, let alone economic challenges, sends a shiver up the spine of the international trading regime.
Australia has much to lose, especially in a trade war between the US and China.
Trump 2.0 needs to be taken far more seriously in terms of the spoken word.
Sometimes the 47th President is merely throwing red meat to the MAGA base.
A good example of this is his declaration to set aside the 14th amendment to the US constitution on citizenship for those born in the US. This can be achieved only by a constitutional amendment rather than a flourish of a black felt-tip pen.
But on trade Trump seems to be in deadly earnest. The question arises: Have we learned from the protectionist impulses of the US congress in 1930?
Smoot-Hawley was seen as the solution to American economic woes. It was the reverse.
Smoot and Hawley are long gone and not remembered. (Both gentlemen lost their seats in the 1932 general election in which president Franklin Delano Roosevelt and the Democrats swept to power under the banner of the New Deal).
But the impact of what they did is as relevant today as in 1930.
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