What History Says About Tariffs

Our next president, Donald Trump, has said that he would increase tariffs on all goods from China by 60 percent and from everyone else, by 10 to 20 percent. History tells us what could happen.

The Impact of Tariffs

Smoot-Hawley/1930s

During 1930, President Herbert Hoover signed the Smoot-Hawley Act. Affecting hundreds of categories and thousands of items, the bill elevated average tariffs from 38% to 45%. But a unit tax magnified its impact. With a unit tax, a ton of steel could have a $100 tariff. However, once deflation struck during the 1930s, that $100 was worth much more.

Still, most economists believe that Smoot-Hawley was not a major cause of the Great Depression. Instead, they say it was a signal that had a calamitous impact on world trade. Generating a cycle of reciprocal tariffs, the act also isolated the U.S. when it stimulated closer trading relationships among other nations.

You can see what happened to egg farmers. After the United States raised its tariff from 8 cents to 10 cents. a dozen. Canada increased its tariff on U.S. eggs from 3 cents to 10 cents a dozen. By 1932, U.S. egg exports to Canada had plunged.

These were the numbers:

Having defeated Herbert Hoover in 1932, most Democrats wanted lower tariffs. The result was legislation in 1934 that spilled over into 2017. The new act–the Reciprocal Trade Agreements Act of 1934–gave the President the power to enter into trade agreements and raise or lower import duties. Extended in 1962 under President John Kennedy, the Act gave President Trump the power to implement his tariff policy.

Trump tariffs 2018-2019

Faced with a tariff, importers have three basic choices. They can absorb it and lower their profits, they could pass along the expense to their customers, or they could renegotiate supply contracts. Then, beyond these traditional alternatives, they can hope for the exemptions that will go to a select group.

For the 2018-2019 round of Trump tariffs, prices went up–usually by the full amount of the tariff.  Furthermore, the U.S. manufacturers that used imported intermediate goods produced less when their costs rose. They also had to deal with retaliatory tariffs that created the pressure to lower their prices.

Summarizing, the National Corn Growers Association recently expressed their concerns. Between the summer of 2018 and the end of 2019, U.S. farmers’ export losses were more than $27 billion because China had diverted business to Brazil (and elsewhere). In addition, when farmers suffer, so too do tractor makers, seed and chemical suppliers, and nearby restaurants.

And making it even worse, because of less demand and more global supply, farmers’ income is already down:

Like lost egg demand during the 1930s, farmers want to avoid sending their Chinese customers to Brazil:

And not need the subsidy checks that replaced lost revenue.

Our Bottom Line: Tax Revenue

Our bottom line is the bottom line.

The Tax Foundation estimates that a “10 percent universal tariff would raise $2 trillion and a 20 percent universal tariff would raise $3.3 trillion from 2025 through 2034, before factoring in how the taxes would shrink the US economy.” They project that tariff revenue will fall far short of the revenue losses created by the 2017 Tax Cuts and Jobs Act (TCJA). They also explain that total revenue raised is less than the customs duty revenue because tariffs reduce incomes and payroll tax totals.

So where are we? As economists, we can be concerned with tariffs.

My sources and more: I recommend starting with a Peterson Institute report and a Washington Post summary of Smoot Hawley. But, if want to read a classic on trade (as did I) do go to Douglas Irwin’s Clashing Over Commerce. and this paper. From there, for the farmer’s perspective, the National Corn Growers Association had lots to say.