Trade Wind-bags: A Tale of Three Tariffs

We look at the 1890 McKinley Tariff, 1930 Smoot Hawley (anyone?) and Trump's Tariff schemes.  

Transcript

Trade Wind-bags: A Tale of Three Tariffs

February 2025

“I am a tariff man, standing on a tariff platform.” 

William McKinley

“William McKinley “was a very good, maybe a great president” who “made our country very rich through tariffs and through talent.” 

Donald Trump

“We call a tariff a protective measure. It does protect; it protects the consumer very well against one thing. It protects the consumer against low prices. And yet we call it protection.”

Milton Friedman

One of the goals of politicians from the time of the first Grand Vizier to Pharoah in Old Kingdom Egypt up until the present day was to make economics not only simple but one without trade-offs. Rulers often do not want choices or nuance, they want that one program that will satisfy their needs.  Sadly, for those of us living on planet Earth, not planet fantasy, the management of an economy includes choices.  

And let me start with a 30-second primer. Tariffs are duties paid on goods imported into the US. The most common type are ad valorem tariffs, which represent a fixed percentage tax on the value of the imports, such as a 25% import tax on goods shipped from Mexico or Canada, such as avocados or lumber. Specific tariffs, which are levied as a fixed charge per unit, such as if the US were to propose a $1 tariff on each imported Mexican avocado.  Finally, “tariff-rate quotas,” which are taxes triggered by reaching a specific import threshold or let’s say the first 1 million avocadoes are free but we charge for the rest.  

From the inception of the Republic to the Civil War and even after, tariffs provided the revenue needed for the federal economy, but these were by no means universally accepted. The agricultural South, net exporters of first tobacco and then cotton, needed foreign markets for their goods, while the North, small industries, and even smaller farms wanted protection from imports.  

Despite these differences, tariffs were the money maker for the majority of the 1800s.  Yet here is the difference between then and now. In 1800, federal spending as a % of GDP was 2.1%.  Even during the big spending of the New Deal in the 1930s, that number was never larger than 9%.  We are in the 21st century, and the leviathan of government is nearing 30% of GDP, a number only matched by our winning a massive two-front war in the 1940s. The ever-growing need for more cash to suck from its citizens has led us from tariffs to excise taxes and, in a fit of socialism, the income tax.  Today, the income tax comprises 49% of federal revenues, with the rest emanating from Payroll taxes, essentially a different form of income tax, and corporate income taxes.  Tariffs, once 90% of revenue in 1800, now involve less than 2%.  

Doug Irwin, an economics professor, brilliantly framed up the goals of tariffs in his book Clashing over Commerce.  Irwin noted the three objectives as revenue, restriction, and reciprocity.  The first is fairly obvious, as it charges a non-US company or nation a fee to bring their goods to American markets.  Restrictions are the use of tariffs to protect US manufacturers and, indirectly, labor markets.  The third is punitive, and in the case of Donald Trump, sometimes it is not about one or two but three.  For example using tariffs to challenge Mexico’s inability, or unwillingness, to stop cartels from bringing Fentanyl into the US.  Reciprocity also determines if another nation slaps a hefty tariff on the goods we wish to import.  If China wishes to become a leader in Soybeans, they will impose tariffs on the goods.  This may prompt a response from the US.  

I provide Irwin’s excellent framework to better understand the tariff goals of William McKinley in 1890 and Smoot Hawley in 1930.  It also helps understand Trump in 2025.  Trump loves William McKinley, or at least on tariffs.  Trump, who, we shall say, is not exceptionally well-read, probably does not know that the big McKinely tariff came not during his presidency but when he was a member of Congress and chairman of the House Ways and Means Committee in the days when Congress ruled. And we shall see on Smoot Hawley; it was Congress calling the tunes, something spotlight-addicted Trump would not have borne very well.  

When Benjamin Harrison was president, the Tariff Act of 1890, commonly called the McKinley Tariff, was an act of the United States Congress, framed by then Representative McKinley, and became law on October 1, 1890. The tariff raised the average duty on imports to almost 50%, an increase designed to protect domestic industries and workers from foreign competition, as promised in the Republican platform. It represented protectionism, a policy supported by Republicans and denounced by Democrats at the time.  During this period, the Democrats, often tagged as Bourbon, were small government, free trade, and states rights party in the image of conservative Grover Cleveland.  

The tariffs were a major topic of fierce debate in the 1890 Congressional elections, and their extremism delivered a Democratic landslide, something that Trump either does not envision or little cares about.  Democrats later replaced the McKinley Tariff with the Wilson–Gorman Tariff Act in 1894, which lowered import and export tariffs and introduced a federal income tax.  But times had drastically changed.  In 1893, the nation was plunged into depression by the panic of that year, and the Democratic party was about to go from conservative to populist to progressive in a single generation.  Wilson Gorman was a direct response to the depression of the 1890s, and interestingly enough, the economy began to recover by 1897.  This was in contrast to the 1930s recession that went on and on.  

However, before we get to that period, there is a fundamental flaw at the heart of Trump’s belief system.  He claims that tariffs raise revenue (Irwin’s first pillar), which they might.  He also says that he wants to help down and out US workers by protecting American industries; Irwin’s 2nd pillar is the restriction of goods that might compete with those made in the USA.  The issue is these goals are fundamentally at odds.  If other nations say screw it, we will swallow the tariffs because we love the US market, then fine and tariff revenue goes up.  But the US industry continues to suffer.  If they balk, and we, as US consumers, are now dependent on domestic markets, then we could see a growth of US outputs and maybe a workforce increase, but then no revenue.  The two things cannot exist simultaneously.  It is either revenue or US growth.  

And there is another issue at the heart of both GOP and Democratic statements.  There is a difference between the US output of goods, especially in manufacturing sectors, and employees working in these industries.  Automakers produced 13.7 million vehicles in the US in 2020, according to the Department of Energy, which tracks car manufacturing numbers by year and type of car. And even that number reflects a pandemic-related dip in production trends. Car manufacturers have produced 16–17 million vehicles annually in the past five years.  1960, the United States produced 7.9 motor vehicles, roughly half of the 2022 numbers.  Yet in 1960, nearly 1/6 of all Americans in manufacturing were in the automotive sector, or nearly 2.4 million employees were producing cars.  Today, that number is 1 million.  Less than half producing 2x the number.  Simple productivity enhancements in the forms of robotics and other efficiencies account for the differences.  There is a clear delineation between domestic industries and their output of goods and Americans employed in manufacturing.  However, automobiles and robots do not vote, and they certainly have no say in swing states like Michigan and Pennsylvania, so there is a fiction that tariffs will somehow produce more labor opportunities.  They might, but it is equally, if not more probable, that US output will increase without increasing jobs or wages in the manufacturing sector.  

The use of tariffs to protect domestic industries strikes me a as backward.  We do not, in 2025 want to defend saddlery, silversmithing, and oat production for that cutting-edge transportation of the late 1800s, horses!  This kind of thinking dominated the Biden Administration and union support.  The goal was not to create a better economy for all Americans.  It was to protect the jobs of voting constituencies for selected and sometimes small (but well-connected) groups.  And as I write this, I cannot help but think of this trend in relation to the mighty Longshoreman unions who keep our transportation network well rooted in the 1950s.  

And onto Smoot Hawley. In Ferris Bueller’s Day Off, they used this very law to illustrate the tedium and dreariness upon which Ferris was saving his girlfriend by having none other than Ben Stein’s famous “anyone, anyone” as a reference to the tariff law.  Of course, I am the guy who gets excited by discussing economic legislation and thinking (hoping) that you valued listeners are also made of sterner stuff.  There are people who fight over bird watching and the designated hitter rule, so we are not the odd ones.  

Smoot-Hawley was named for Senator Reed Smoot of Utah, chairman of the Senate Finance Committee, and Representative Willis Hawley of Oregon, chairman of the House Ways and Means Committee, who pushed for higher tariffs to protect domestic farmers.  

First, an aside.  I miss the days when legislators packaged legislation intending to cement their names for posterity.  Much of that changed with Roosevelt in the New Deal; instead of the Scott Act or Sherman Anti-Trust, we get circus names such as the Affordable Care Act, which made healthcare more expensive, or the Inflation Reduction Act, wherein inflation went up.  We need truth in labeling so that Biden’s bill was truly the “Green subsidy handouts to well-connected constituencies with money that we do not have BILL.  Or the GSHOWC with MWAHB because, you know, acronyms.  But I digress.  

It should be noted that it was Congress in those days who enacted legislation because, according to this pesky thing called the Constitution, it was their job with the executive to carry out the laws.  It’s hard to imagine with the backboneless, gutless sniveling little cowards in Congress today, but again, I digress.  In 1930, the Republican party held the White House, and Republican protectionists controlled the House Ways and Means Committee, which advocated for high tariffs.  The Smoot Hawley bill, originally aimed at protecting American farmers by taxing agricultural imports, soon spiraled out of control, with representatives from various sectors, astonishingly, calling for increased protection for their favored groups as well.

In a research piece for the Cato Institute written by Kris James Mitchener, Kirsten Wandschneider, and Kevin Hjortshøj O’Rourke, the authors note Smoot Hawley, “Our results show that countries that responded to Smoot-Hawley with retaliatory tariffs which reduced their imports from the United States by an average of 28–32 percent. Our model estimates show that retaliators significantly reduced their purchases of key US exports, especially automobiles after Smoot-Hawley passed. For example, even when controlling for aggregate US exports to certain markets, we show that chief U.S. exports to retaliators were differentially affected, falling by an additional 33 percent after the United States raised tariffs in 1930—a result that is consistent with trade partners targeting goods that were particularly important to the United States.”

Numerous countries, including Canada, retaliated against Smoot Hawley with their tariffs. In 1929, 18 percent of America’s exports went to Canada, accounting for 11 percent of its imports. These were slashed by one-third. And keep in mind this was simultaneous to workers losing their jobs prior to the passage of the tariff.  The Great Depression was a fire, and Smoot Hawley poured gasoline on the inferno, burning through the 1930s economy.  

Serah Louis, writing for the Financial Post, noted the bill. “More than 1,000 economists protested the bill to then-United States President Herbert Hoover, but he signed it anyway, which increased tariffs on foreign exports to the U.S. by about 20 percent.” Andreas Schotter, a professor of international business at the Ivey Business School, said Trump is using tariffs as a bargaining chip in non-trade issues, such as immigration, currency dominance, and geopolitics, “which could lead to more complex and unpredictable retaliation” from other countries.

So, that thing called history. 

In the 1890s, the McKinley tariffs were enacted—economic calamity soon followed. Then lower tariffs, the economy improves.

It’s not exactly the same order for Smoot Hawley. First, there was economic calamity, and then tariffs were enacted. The economy did not improve over the next TEN years until World War II.  

Now, in fairness, Franklin Roosevelt was given the power by Congress to strip out some of Smoot Hawley’s worst tariffs, but it was too little too late.  “The Smoot Hawley tariffs of 1930 had much more to do with the Great Depression than the stock market,” noted economist Thomas Sowell.  FDR never ended the recession, but his supine Congress, mirroring our own, did cede that crucial power, taxation by another name, to him and future presidents.  Because tariffs are indirect taxes, they should be in Congress, but thanks to FDR, they are not.  

I imagine Trump loves tariffs for a number of reasons.  But I cannot shake the reality that the so-called Tariff Man is now at the center of all business negotiations.  Not with foreign nations, though it certainly does that, but rather with all manner of industries and companies.  Do regulations protect us or harm us?  It depends on several factors, but there is a debate here.  What is not debatable is those imposing the regulations have the power.  Do tariffs help or harm?  Again, an argument.  What is not arguable is that a free trader cedes the power to pick winners and losers, whereas the tariff advocate accrues power.  Thus, we are surprised that Trump, who is not a conservative and not precisely a humble man, would take a position that essentially enhances his power. “Tariff policy beneficiaries are always visible, but its victims are mostly invisible. Politicians love this. The reason is simple: The beneficiaries know for whom to cast their ballots, and the victims don’t know whom to blame for their calamity,” said the late great Walter E. Williams. 

As Milton Friedman notes, “Each of us tends to produce a single product. We tend to buy a thousand and one products. If we impose a tariff on steel or restrict imports of steel in other ways, the people who benefit are visible, clear, available, and apparent. They have a very strong interest in pressing for restraints in that respect. The interests of the rest of us are very diffuse. Each of us will pay a few dollars more. We don’t have the same interest to oppose it.” This is Friedman speaking for the CEO of GM, who will beg Trump for higher tariffs on Toyotas driving up the price of Toyotas and the American consumer paying more for those Toyotas.  

I can argue against tariffs because I do not want the government to have any additional power over my life.  But I can also make it because President McKinley reversed his tariff policy during his 2nd term.  Not only were excise taxes replacing tariff revenue, but the massive output of US Manufacturing meant domestic consumers could not handle the surplus.  We needed foreign markets for everything from oil to steel exports.  The US made better, cheaper stuff.  Exporting worked because the demand for US goods was so strong. Hence my snarky comments earlier about saddlery.  More focus is placed on producing what the world wants, and the labor market will care for itself—less on protecting moribund, anachronistic jobs.  

“The tariffs are going to make us very rich and very strong,” Trump said Friday. “They don’t cause inflation. They cause success.” Eric Boehm, writing for Reason writing in response, states, “The president has been using variations on this same argument for months (for years, actually). They are “going to make us rich,” he said in December. “In the 1890s, our country was probably the wealthiest it ever was because it was a system of tariffs,” he said on the campaign trail last year. This is BS, by the way. The high tariffs that America imposed during the late 19th century did not make America rich and did not make American manufacturing strong. It’s also absurd to claim that the country was at its wealthiest in an era when most people could not access indoor plumbing, electricity, or modern medical care—and when the average person was, objectively, much poorer.”

This brings another problem with Trump’s theories.  He threatens to impose tariffs, then backs off with a (often small) concession.  “President Donald Trump held off Monday on his tariff threats against Mexico for one month of further negotiations after Mexican President Claudia Sheinbaum agreed to send 10,000 members of her country’s national guard to the border to address drug trafficking,” the Associated Press reported. As Boehm adds, “Wait, what happened to endless prosperity and success? If tariffs are as great as Trump says they are, he should be implementing them no matter what the leaders of any other silly little countries say or do. We can tax our way to prosperity, Trump claims, but we’ll…not do that, I guess?”

Either tariffs are revenue producers, so keep them, or they are sticking to make other countries do things, but both things cannot be accurate simultaneously. That’s not a conclusion that’s drawn by reviewing the piles of available evidence about the effectiveness or the cost of tariffs. It’s not a conclusion based on the opinions of the scores of economists who say Trump’s trade war is a foolish, counterproductive move. It’s a conclusion drawn solely from the contradictory arguments that Trump is making as he threatens to start a continent-wide trade war.

One of the key differences between the 1890s, the 1930s, and today is a simple conception of seriousness.  In the 1890s, we were still a largely agricultural nation transitioning, hard, to an industrial one.  Politicians of that day were navigating between the needs of farmer constituencies and the desire for global industrial leadership.  

Smoot Hawley came in the wake of the stock market crash of 1929 and years of farmer issues all through the 1920s.  The desire to protect agriculture was a sincere one.  I do not agree with the tariff policies employed but conclude the men pushing for this were genuine in their aims.  Trump is not truly a serious person.  He never has been.  Yet he has been given, largely through the incompetence, radical positioning, and venality of the democratic party, a 2nd chance at power.  His ability to disrupt international trade, impose additional costs on American consumers, and plunge nations into trade wars is serious indeed even if he is not.