President Trump made tariffs a centerpiece of his 2024 political campaign. During his first term, he significantly increased tariffs. Now, he is levying substantial tariffs on imports via executive orders with additional tariffs and increases widely expected.
So, what does history tell us about tariffs? In his 1929 address to Congress, Congressman Hamilton Fish reminds us that the perceived need for “protective tariffs” has been part of the political economy for decades.
Here are some examples of how tariff history can provide important context and a reminder of the range in outcomes — including unanticipated outcomes:
- The first foray into tariff policy began on April 9, 1789, when President James Madison introduced a bill to the U.S. House of Representatives proposing duties on alcohol imports.
- From 1789 to 1934, it was common for industries to lobby Congress for preferential tariff rates. The beginning of the lobbying industry can be traced to tariff-related lobbying. Bribery was also common back then.
- During the 19th century, tariffs represented as much as 90 percent of federal revenue.
- The 1888 presidential campaign was mainly about tariffs.
- Some economists believe, with the exception of slavery, that tariffs were the most contentious policy issue of the 19th century through the Great Depression.
- Because tariff policy became so special interest-driven and lobby-laden, the 16th Amendment to the Constitution allowing a federal income tax was ratified in 1913.
- The infamous protectionist Smoot-Hawley Tariff Act in 1930 backfired and deepened the Great Depression, especially hurting farmers and triggering a farm loan crisis.
- After World War II eliminated significant competition for the United States, an ideological change emerged with an abrupt move away from protectionism to free markets and international trade. U.S. manufacturers sought access to foreign markets, especially in Europe.
- Protectionist tariffs contributed to diplomatic turmoil, international retaliation and worsened recessions.
Over long periods of time, history teaches us that the tariff sentiment of the country and leanings of politicians continuously move along the protectionist-trade continuum. The period between 1900 and 1940 was basically a protectionist period, while post-World War II was far less restrictive and protectionist.
Today, it appears that President Trump’s policies could take tariffs to their highest rates in decades. He intends to use tariffs as a means to address immigration, drug traffic into the United States, the trade deficit, unfair trade practices of selected countries and offshoring of American manufacturing to protect manufacturing jobs.
So, how will all of this play out? Who will be the “winners and losers?”
Macro-Economic Perspective
Looking first at the overall economy, here are some initial thoughts from a macro-economic perspective:
- If companies increase the price of their goods and services due to tariffs increasing their costs, that could worsen inflation.
- If the larger tariff-increases impact basic consumer needs such as food and automobiles, that could hit the low- to middle-income class especially hard.
- If countries restrict the flow of critical components (e.g. chips and rare earths), key industries such as medicine that rely on these materials could suffer.
- If the Federal Reserve perceives renewed inflationary pressures from a more aggressive tariff policy and its domino effects that could cause the Fed to pause its plans to reduce interest rates — or perhaps increase rates.
- If foreign countries retaliate with more aggressive trade policies, a trade war could ensue, further restricting trade.
- If dislocations in trade reach a point of causing societal unrest in some countries, that could lead to heightened geopolitical tensions.
These potential impacts are an incomplete list, but it provides a sense of the far-reaching implications of trade policy and tariff rate increases.
Micro-Economic Perspective
Turning now to how a more aggressive tariff policy might impact American companies, here are a few thoughts:
- Increased cost of raw materials potentially eroding profits if not offset with higher prices. Also, increased shipping costs and increased inventory carrying costs associated with front-loading of supplies.
- Retaliatory sanctions and tariffs for export-focused companies. These may be targeted by foreign governments to prove strength to their constituents.
- Disrupted supply chains. Companies may have logistical issues and/or higher costs, particularly if certain tariffed items become difficult to source. Locating new supply chains is complex and expensive, as is building trust with new partners – all of which will likely increase input and operating costs.
- Decreased demand for products, possibly leading to permanent market share loss. This could occur in the U.S. (or for exports) if tariffs cause prices to be unaffordable or unattractive to substitutes.
Potential Benefits
There could also be some positive benefits. Over time, supply chains could improve and become more diversified and resilient. As companies move to new suppliers, that could spur growth in local manufacturing, potentially increasing the reliability of supply with future production. Stronger companies could eventually take market share from weaker companies who fail to adapt.
Adaptability is the Key
In many ways, a change in tariff policy is just a change in the overall competitive landscape, a change in the cost of doing business. Yet, it is another “new issue” that companies must face.
Successful companies effectively adapt and compete. For example, some companies are already planning to reroute their supply chains. Others are pre-buying critical raw materials and parts ahead of anticipated tariff increases.
Global companies are planning on selling more goods in the foreign countries in which they produce in order to avoid tariffs. Other companies will be refining their manufacturing strategies by producing goods in countries such as China or Mexico – then selling them locally, thereby reducing tariffs.
To avoid the “made in China” tariff target, some companies are arranging for assembly, especially final assembly, in more “friendly” countries.
There will be companies that strategically absorb the increased tariff cost and do not raise their prices to maintain or increase market share – while others will raise prices to protect profit margins.
Changing Winds
The tariff political winds are always changing. Policies can be short-lived due to changes in Congress or the Executive Branch, unanticipated consequences or retaliatory actions by foreign governments. Oftentimes, the impact of policies does not follow the cause-and-effect linear path many talk about.
Given the highly charged political sentiment surrounding tariffs — and its long history of changing over time — we simply can’t predict their specific impacts or various paths and permutations. That crystal ball does not exist.
