Look to history to understand the US tariffs
The US government recently imposed a tariff of 25% on steel and 10% on aluminum imports from all countries except Canada, Mexico, Argentina, Brazil, Australia, South Korea and the European Union (EU). On 22 March, US President Donald Trump signed an executive memorandum instructing the office of the US trade representative to impose retaliatory tariffs on up to $60 billion in Chinese imports. These measures are textbook examples of economic policy making to serve narrow political interests.
The US has a history of imposing high tariffs when it suits the interests of various pressure groups within the country. The two most important tariffs enacted in its history are the Fordney-McCumber tariff of 1922 and the Smoot-Hawley tariff of 1930. The Tariff Act of 1922 increased the average tariff on dutiable imports from 16.4% to 36.17%. The Democratic president, Woodrow Wilson, did not support such a steep hike and vetoed the legislation passed by Congress on his last day in office. His successor, Republican Warren Harding, signed it into law within three months of assuming office. The Smoot-Hawley Act came into force on 17 June 1930. Initially, president Herbert Hoover, a Republican, opposed increase of the already high tariff regime. More than a thousand economists signed a petition to the president opposing the new tariff proposal. Big corporations as well as large Wall Street firms opposed the Bill.
The main supporters of the Bill were those industries and farmers who expected to benefit directly from enhanced tariffs on goods that they were producing. It is interesting to note that one of the major losers was the auto industry; no wonder Henry Ford vehemently opposed the Smoot-Hawley Tariff Act, calling it “an economic stupidity”.
With Democratic president F.D. Roosevelt entering the White House in 1933, the US started changing its trade and tariff policies. The Reciprocal Tariff Act of 1934 authorized the president to enter into bilateral negotiation with foreign nations to reduce tariff on a reciprocal basis. This Act is considered the beginning of a liberal trade regime policy by the US.
The pursuit of liberal trade policy has continued under both Republican and Democratic presidents. President John F. Kennedy brought in the 1962 Trade Expansion Act and helped start the Kennedy Round of world trade talks. President Ronald Regan launched the Uruguay round of the General Agreement on Tariffs and Trade in 1996, and president Bill Clinton helped establish the World Trade Organization.
This is the period in which the US economy clocked the highest average growth in gross domestic product (GDP). From 1950- 2010, the decadal growth rates of US real GDP were: 3.6% (1950s), 4.3% (1960s), 3.2% (1970s), 3.3% (1980s), 3.3% (1990s), 3.4% (2001- 10) and 2.1% (2011-17). We may also note that US share in world exports during the same periods were: 15.4% (1950s), 14.2% (1960s), 11.7% (1970s), 11.2% (1980s), 12% (1990s), 9% (2001-10) and 8.5% (2011-16). Thus, a nation’s economic policy making is guided by national self-interest alone.
But should we blame the present president for being ignorant of the complexities of international trade theory and mistakenly assuming that high tariffs would be a remedy for the loss of competitiveness of some the US industries? I believe not. He is, in fact, in the good company of some of the doyens among 20th century economic theorists. Let us take the example of John Maynard Keynes, who can be considered the most influential British economic thinker of the last century.
Keynes was an ardent advocate of free trade as long as his own country was the dominant economic power of the world. But as the British economy started to falter with rising domestic unemployment, Keynes reversed his stand. Regarding Keynes’ views on protectionism, Barry Eichengreen has this to say: “Keynes repeatedly reversed his public position on the advisability of protection, and it has been difficult to portray the sequence of seemingly contradictory recommendations as a logical progression of thoughts”. Of course, he found Keynes “surprisingly consistent” in the context of his view on what the paramount goal of economic policy should be. And that goal is maintenance of full employment in his nation. Joseph Schumpeter has rightly said that policy recommendations by Keynes could be seen as “always English advice, born of English problems even when addressed to other nations”.
In 1933, Keynes gave the inaugural Finlay lecture titled “National Self-Sufficiency” at Dublin. While not outrightly rejecting the rationales that he had espoused earlier in defence of free trade, he came to justify some of the protectionist measures of the Irish Free State with the following words:
“It is my central contention that there is no prospect for the next generation of a uniformity of economic system throughout the world, such as existed, broadly speaking, during the 19th century; that we all need to be as free as possible of interference from economic changes elsewhere, in order to make our own favourite experiments towards the ideal social republic of the future; and that a deliberate movement towards a greater national self-sufficiency and economic isolation will make our task easier, in so far as it can be accomplished without excessive economic cost.”
Thus, Keynes was apparently justified, from his perspective, in changing his earlier position on free trade because in his opinion, the uniformity of the economic system prevailing in the 19th century had changed. But in reality, what had changed was the loss of uniformity brought about by the suzerainty exercised by the British empire on the world at large. Today, the US is in a similar position. We are yet to see whether this repetition of history will end in tragedy or farce.
Ashok Nag is a retired senior executive of the Reserve Bank of India.