- Formidable
- Posts
- What history teaches about protectionism
What history teaches about protectionism
The U.S. has a long history with tariffs and embracing industrial policy.
What you probably already know: President Donald Trump announced sweeping “baseline” tariffs on all countries — and higher tariffs for what he called the “worst offenders” — exporting goods to the United States. Wednesday’s announcement sent global financial markets plunging, with the U.S. dollar falling to its lowest level since October. The Dow fell 1,679 points (or 3.98%), the S&P 500 was down 4.84%, and the Nasdaq had dropped 5.97% on Thursday, marking Wall Street’s worst day since 2020. As history has shown, protectionism can lead to unintended, costly consequences at home and around the world.
Let’s go back in time just a bit: Alexander Hamilton advocated a protectionist economic policy to shield America’s “infant industries” from more efficient foreign competition and reduce reliance on British imports when he stepped in as the country’s first Treasury Secretary in 1791. Then, with the boom of industrialism, the U.S. imposed some of the highest tariffs in the world (about 40-50%) on foreign imports starting in the second half of the 19th century. This not only protected the country’s young industries, but also generated revenue for the federal government. The policy continued until the U.S. passed legislation in 1913 lowering tariffs — an experiment that lasted until the 1920 election of President Warren Harding. World War I had stimulated U.S. industries like agriculture, but these needed protection as Europe recovered post-war. At the onset of the Great Depression, Congress passed the Tariff Act of 1930 (aka the Smoot-Hawley Tariff Act) to implement protectionist trade policies and help farmers, but it’s widely considered to have worsened the Great Depression by triggering foreign retaliation and a 66% drop in global trade. By the end of World War II, the U.S. had established global economic dominance and it was time for a new free trade strategy that has, for the most part, been in place up until now. For a free trade system to continue benefiting American interests, the U.S. needs to retain its industrial supremacy. Despite China’s rapid economic growth over the past two decades, the U.S. share of global GDP has remained stable, even rising in recent years.
What it means now: American shoppers and businesses will face higher costs on everything from cars to clothes to wine. The Wall Street Journal speculates that higher tariffs will gradually erode U.S. competitiveness and lead to a slump in innovation. Unilateral tariffs also invite retaliation, which would hit U.S. exports directly and indirectly as other countries broker trade deals that don’t favor American businesses, breaking the global economy into rival blocs. Trump’s “America First” policies may aim to fix the disparities created by decades of hyperglobalization and right unbalanced trade relations with countries like China, but a shift toward protectionism that triggers trade wars could just as likely cause a recession at home and abroad, with poor countries hit the hardest, and upend American influence. "Uncertainty will spiral and trigger the rise of further protectionism. The consequences will be dire for millions of people around the globe," said European Commission President Ursula von der Leyen.
What happens now? Trump’s step toward reviving an era of protectionism could provoke a global retaliatory response if a 20% average tariff remains in place for more than a few months, analysts say. China has already vowed to take unspecified retaliatory actions. European Union officials are hoping for trade talks but are preparing phased countermeasures. Mark Zandi, chief economist of Moody’s Analytics, told USA Today the avoidance of a recession depends on some countries choosing not to retaliate. That, combined with the federal government making exceptions and offering subsidies to American farmers, could bring the average tariff rate down to 15%.