Tariffs then and now (Part II)
From protectionist tariffs to (almost) free trade
[Disclaimer: I am not an economist, so these are just my personal thoughts. Except the history parts, those are…history.] This is part II of my series on tariffs, you can find part I here.
As we pick up where we left off, we are now in the years leading up to the Great Depression. Tariff adjustment control has passed from Congress to the Executive Branch (i.e. the President) with input from the Tariff Commission. Retaliatory tariffs from other countries are starting to dry up international trade. The year is 1922.
Before we move forward from this point in time, it is worth mentioning that the tariffs of 1921 and 1922 took place under the presidency of Warren G. Harding. [As an Ohioan by birth, I am downright embarrassed that Harding was from Ohio.] It can be argued that Harding’s administration was the most corrupt government of all time (so far). See my post on Harding here. And another Substack post by Wendy here.
Special interest groups wanted to see some modifications to tariffs as the end of the 1920’s approached. The Smoot-Hawley Tariff raised protectionist rates to the highest levels thus far. Manufacturing and agriculture were pleased with the new rates, however economists were not. Over 1,000 economists signed a petition begging President Hoover to veto the bill, but he signed it into law in 1930, just months after the beginning of the Great Depression.
During World War I, American farmers supplied millions of tons of food to support Europe. Farmers expanded to keep up with demand, often through bank loans. As Europe eventually returned to normal, there was less demand for American crops. Farmers are selling less, but their loans are still coming due. Twice, Congress tried to pass subsidies to aid farmers in the 1920’s, but both times it was vetoed by President Coolidge. So, Hoover ran partly on a campaign of aiding farmers. Thus, the Smoot-Hawley tariffs were seen as a great thing by farmers.
While the Smoot-Hawley Tariffs did not cause the Great Depression, there is no doubt that it did slow recovery from it. Additionally, the tariffs prompted retaliatory tariffs from other countries. Canada, then as now, one of our biggest trading partners, jacked up tariffs on products coming from the US while simultaneously lowering tariffs with other countries, like Great Britain, on the same items. Over the next five years, international trade declined by 2/3rds.
These tariffs also created non-economic effects such as decreasing willingness to participate in common defense. Germany suffered from the resultant world trade war and had a difficult time paying back the reparations due from World War I. This in turn laid a fertile ground for the rise of the Third Reich.
Although some articles have been written about the similarities between Smoot-Hawley and circumstances with the Trump tariffs, there are a few key differences.
1930 - trade accounts for 5% of GDP
2025 - trade accounts for 25% of GDP
1930 - 16% of global goods output
2025 - 60% of global goods output
So, the economy is far more global in 2025, than in 1930, which could lead to even more catastrophic consequences for a protracted tariff war. Hoover, Smoot, and Hawley all lost their political positions in 1932 as a result of blowback from the tariffs.
In 1932, in addition to the landslide victory of Franklin D. Roosevelt for President, another key measure was enacted that influenced global trade. In the Ottawa Agreements, favorable trade rates, Imperial Preference, were established between Britain, Canada, and all colonies related to them. These included quotas allowed duty-free for grain, meat, fruit, and dairy. The net effect of these accords hurt US trade even more.
President Roosevelt appointed Cordell Hull to Secretary of State in 1933. From his early career in Congress, Hull opposed protectionist tariffs. He believed that freer trade would lead to lasting peace, whereas high tariffs would lead to war. Hull spearheaded efforts to bring about amendment of the Smoot-Hawley tariffs, with passage of the Reciprocal Tariff Agreements Act of 1934. This act placed more authority within the Executive Branch, thus under Secretary Hull’s control. The Act gave the Executive Branch power to raise or lower rates by 50%, through binding bilateral trade agreements with other countries, provided that the US also received preferential access to their markets. By removing full control from Congress, tariffs would no longer be as susceptible to special interest groups.
After World War II ended, the General Agreement on Tariffs and Trade (GATT) was drafted in 1947, and was a key component in the formation of the United Nations in 1948. The United States and Great Britain jointly took the lead on this policy, which was to create a more global unified trade agreement throughout the world. Two primary goals were to end Imperial Preference and reduce protectionist US tariffs, both of which would allow for more trade growth. The GATT had 23 original signatories, which later expanded to 128 countries by the time the World Trade Organization (WTO) was established in 1995.
The GATT was not a legal treaty per se, but a mixture of outlining obligations and best practices. This enabled all participating countries to have a common playbook when it came to international trade and help to liberate trade policies. President John F. Kennedy oversaw reduction of GATT, primarily towards Europe, by up to 50%. President Lyndon Johnson continued the trend of reducing rates with Europe, up to an additional 33% discount.
The next big tariff-related legislation was the Trade Act of 1974, which enabled the President to create duty-free imports from developing nations to help promote their economic growth. Overall, however, GATT policies are the prevailing trade guidelines into the 21st century. President Bill Clinton oversaw the establishment of NAFTA (North American Free Trade Agreement) in 1993, which helped to supercharge the US free trade with our two closest neighbors, Canada and Mexico. And in 1994, the World Trade Organization was formed to help negotiate global trade inequities.
And so things have remained more or less stable until 2025 with the advent of tariffs implemented by the 1st and 2nd Trump administrations.
There are three key pieces of legislation that grants authority to the President to impose tariffs, but only under specific circumstances.
The Trade Expansion Act of 1962 gave the President the authority to impose tariffs on imports that threaten national security, but only after an investigation.
The Trade Act of 1974 gave the President the authority to impose retaliatory tariffs to counteract unfair foreign trade practices.
International Emergency Economic Powers Act (IEEPA) gave the President power to regulate commerce under a national emergency that involves a foreign threat, but it requires a declaration.
Other than these exceptions, Congress still holds the power to impose tariffs under Article I, Section 8 of the US Constitution.