Before the current torrent of new tariff hike pronouncements by the Trump White House, all I knew about tariffs (aside from spelling it) was the Smoot-Hawley Tariff Act, the last legislation under which the U.S. Congress set actual tariff rates.
Back in 1930, after the stock market crash in 1929, protectionism against what was considered to be unfair foreign trade practices gained popularity. The purpose of tariffs, according to Dartmouth economist Douglas Irwin, is “to raise revenue for the government, to restrict imports and protect domestic producers from foreign competition, and to reach reciprocity agreements that reduce trade barriers.”
So, in 1930 the Republican-controlled Congress passed the Smoot-Hawley Tariff Act and the Republican President, Herbert Hoover, signed the Act into law despite a petition from over 1,000 economists urging the President to veto the legislation.
As a result, the legislation substantially contributed to a two-thirds decline in imports from and exports to Europe between 1929 and 1932, and global trade dropped by similar levels over the four years the legislation was in effect.
In other words, the tariff increase made the economic hardships of the Great Depression worse worldwide, undermined confidence on Wall Street, and undeniably ushered in an era of U.S. isolationism.
However, the U.S. tariff saga doesn’t begin and certainly has not ended with Smoot-Hawley. In fact, tariffs played a significant role in driving the American colonies to revolt in the first place. Under British rule, the colonies were denied tariff protection for their fledgling new industries. This became such a key impetus for independence, that the Tariff Act of 1789 was the second bill signed by President George Washington in the new Republic, imposing a tariff of five per cent on most imports, with few exceptions.
Our first president felt so strongly about “fair” trade that he sent a ship christened the “Empress of China” to trade directly with China, cutting out the cost of the middleman, Britain. Founding father, Alexander Hamilton, was the principal proponent of protectionist theory and the use of tariffs. He believed in custom barriers to help nurture American industrial development and protect “infant industries.” And his theory prevailed and protected U.S. industrialization with the highest tariffs of any nation from 1816 to the end of World War ll in the 1940s, making us the wealthiest nation on earth.
Thereafter, however, another approach coined “free market” economics began to take hold in the U.S. and American tariffs declined.
Globalization slowly replaced the dominance of “Protectionism” in the formulation of U.S. economic policy. Simply defined, “globalization is the process of increased interconnectedness and interdependence among countries, fostering the exchange of goods, services, information, and ideas on a global scale. On the other hand, protectionism refers to the policies and practices that nations adopt to shield their domestic industries from foreign competition. This often involves the imposition of trade barriers such as tariffs and quotas,” according to the Global Finance Banking Review.
“The trouble with tariffs, to be succinct, is that they raise prices, slow economic growth, cut profits, increase unemployment, worsen inequality, diminish productivity and increase global tensions. Other than that, they’re fine.”
The detractors of both approaches to international trade are numerous. And although most economists agree that Globalization fosters economic growth by expanding markets and promoting competition, the policy inevitably leads to the migration of working class, middle skilled, jobs offshore to lower cost labor markets, namely other countries, such as China.
This has gutted whole communities, nay, whole regions of the country, dependent on manufacturing jobs to economically support an ailing American working class. No wonder a Svengali-like Trump got reelected with blue collar workers’ votes from across the nation.
Michael Collins of Industry Week puts it this way “Free trade has been very hard on workers, manufacturers, suppliers and industries, and has inflicted pain on the weakest members of society. The benefits have accrued primarily to the affluent and multinational corporations. Free trade has become a one-sided process where the benefits flow to capital and the costs to labor. For working Americans, it has become a race to the bottom.”
However Protectionism has its own pitfalls.
“The trouble with tariffs, to be succinct, is that they raise prices, slow economic growth, cut profits, increase unemployment, worsen inequality, diminish productivity and increase global tensions. Other than that, they’re fine.” according to David Kelly, Chief Global Strategist at JP Morgan.
Omar Ocampo of Inequality.org puts it in perspective this way “Furthermore, these import taxes will not be paid by foreign firms or countries. The tariffs will be paid by US citizens and residents, and it will make an array of imported consumer goods more expensive, putting a greater strain on the budgets of working-class households. One estimate says that “Liberation Day” will reduce disposable income of the average household by at least $1,600 and as much as $2,000. In short, it will not enrich our citizens”
For now, the effects of new tariffs is most pronounced in the loses and volatility of stock markets around the world, and, even more worrisome, the selloff in the U.S. bond market. “We may be headed for a serious financial crisis wholly induced by U.S. government tariff policy,” stated Harvard University economist and former Treasury Secretary Lawrence Summers who went on to say “Long-term interest rates are gapping up, even as the stock market moves sharply downwards. This highly unusual pattern suggests a generalized aversion to U.S. assets in global financial markets. We are being treated by global financial markets like a problematic emerging market.”
In other words, fixed income investors are worried that the Chinese and other foreigners just might start selling their U.S. Treasuries to protest the tariffs. All this financial havoc is threatening the very existence of small businesses dependent on the sales of imported goods or supply chain imported components for their manufactured products.
“One small business in my district saw its costs to import one shipment of goods rise from $500 to $13,000 overnight, which is an increase they simply can’t absorb.”
Pasadena-area Congressperson Judy Chu told Local News Pasadena, “One small business in my district saw its costs to import one shipment of goods rise from $500 to $13,000 overnight, which is an increase they simply can’t absorb. But the reality is that these effects are just the beginning. As ports like ours here in Los Angeles see cargo traffic collapse, Americans in Southern California and across the country will see fewer products on the shelves and even higher prices. And supply chains will be turned upside down as the workers who move goods, like truck drivers, lose their jobs because of the reduced demand for freight.”
Under current tariff policy, taxes will increase for the 20 percent poorest households four times more than those in the top 1 percent, according to an analysis by the Institute on Taxation and Economic Policy. In 2026, that amounts to a tax increase of 6.2 percent for households that earn less than $29,000 compared to a tax increase of only 1.7 per cent for households that earn more than $915,000, ITEP found.
Ironically, researchers at the Heritage Foundation, a conservative think tank, wrote in 2017, during Trump’s first term, “Tariffs are just taxes on Americans by another name. [They] raise the price of food and clothing, which make up a larger share of a low-income household’s budget, in fact, cutting tariffs could be the biggest tax cut low-income families will ever see” as reported by Greg Iacurci of CNBC.
On top of all that, there are some financial forecast predictions that we may be barreling into a recession. For instance, JP Morgan increased the risk of a global recession from 40 percent to 60 percent before tariffs were announced.
In his annual letter to investors, JP Morgan CEO, Jamie Dimon warned that the tariffs “will likely increase inflation” and are prompting “many to consider a greater probability of a recession.”
What are we to do about all this financial upheaval and chaos?
Well, perhaps we should heed the advice of the Global Finance Banking Review: “As the world navigates the complexities of globalization and protectionism, finding a balance that maximizes the benefits of global connectivity while addressing local concerns is crucial. Policies must be crafted with a nuanced understanding of the multifaceted impacts on economies, cultures, and societies. Striking this delicate equilibrium will be essential for fostering a sustainable and inclusive global future.”
All this is reminiscent of President George H. W. Bush’s characterization of “Reaganomics,” which he coined “Voodoo Economics.” It’s trickle-down theory proposed that tax cuts for wealthy individuals and corporations would ultimately benefit the entire economy. Similarly, the effects of tariffs will ultimately be less punitive on the rich than on the poor.
As I walk my supermarket aisle shocked at the price of groceries, it’s like “voodoo economics” all over again.
