Protective tariffs risk triggering a cycle of escalation that ends well for no one.
Illustration by The Atlantic. Source: Getty.
Donald Trump is fond of saying that trade wars are easy to win. Among the litany of patently false Trumpisms, this may well prove one of the most disastrous.
Last week, Trump claimed that his threatened—and deferred—25 percent tariffs on Mexico and Canada will finally go into effect tomorrow. He also said that existing 10 percent tariffs on Chinese goods will double. Whether he’s bluffing is anyone’s guess.
Protective tariffs risk triggering a cycle of escalation that ends well for no one. First comes increased consumer prices. The general public well understands that tariffs worsen inflation; the mere expectation of inflation tomorrow drives inflation today, and consumers have already begun stockpiling goods in anticipation of higher prices. Worse, tariffs increase the costs of foreign-material inputs for domestic manufacturers and make their products uncompetitive abroad—think of the U.S. auto industry’s consumption of foreign steel and aluminum, newly subject to substantial import levies.
Rogé Karma: The tariffs were never real
Next, foreign trading partners retaliate with tariffs of their own, further reducing the international competitiveness of domestic manufacturers. Finally, tariffs strengthen the dollar, which makes American products yet more expensive abroad. As former Secretary of State Cordell Hull once put it, “A prohibitive protective tariff is a gun that recoils upon ourselves.” And that’s just the economic damage. Trade wars can, and do, evolve into shooting wars.
Today’s globalization discontent begins with Henry Bessemer. His blast furnace, invented in 1858, slashed the cost of high-quality steel. Prior to Bessemer, the cost of overland transport was prohibitive. The iron steam engines of the early 19th century were so weak that they occasionally needed a push start, and iron tracks supported relatively little weight and wore out quickly. Until the late 19th century, a productive wheat farm or cattle ranch more than 30 miles from a port could sell its produce only locally; within decades of Bessemer’s invention, cheap grain from the American hinterlands and affordable meat carried in refrigerated ships from the Argentine pampas overwhelmed European markets.
Well into the 20th century, most Frenchmen and Germans worked on the farm. They were savaged by the flood of cheap foreign produce and soon demanded, and obtained, protective tariffs, which triggered a global trade war lasting decades. On the other side of the Atlantic, advanced farm machinery increased American farm productivity and yielded bumper crops that drove down grain prices. Hard-pressed farmers mistakenly identified foreign competition as the culprit; the ultimate result was the Smoot-Hawley Tariff Act.
Even a century ago, economists well understood tariffs’ corrosive effects. On May 30, 1930, President Herbert Hoover was presented with a petition signed by 1,028 economists, urging him to veto the bill. “A higher level of protection,” they wrote, would “raise the cost of living and injure the great majority of our citizens.” To no avail: Hoover signed it 18 days later.
In the event, the economic damage from Smoot-Hawley turned out to be relatively mild. At that time, international trade constituted only 9 percent of America’s GDP, and the one-third falloff in global commerce, mitigated by the replacement of foreign goods by more expensive domestic ones, meant that the tariffs were responsible for just 1 or 2 percent of the Great Depression’s approximately 30 percent GDP drop.
The law proved calamitous nonetheless, by corroding the political and moral intangibles of trade that John Stuart Mill had eloquently described more than a century earlier:
Commerce first taught nations to see with goodwill the wealth and prosperity of one another. Before, the patriot, unless sufficiently advanced to feel the world his country, wished all countries weak, poor, and ill-governed but his own: he now sees in their wealth and progress a direct source of wealth and progress to his own country.
Smoot-Hawley wrought fearsome geopolitical turbulence. American products suffered boycotts, Americans abroad found themselves the recipients of personal insults, and the world’s foreign ministries erupted in protest. Crucially, the act crippled Germany’s ability to export its way out of the onerous Versailles reparations.
Few understood the connection between the period’s trade wars and the Second World War’s cataclysm better than the Jewish economic historian Albert Hirschman. As a young man, he had fled Germany, fought in the French Army, and helped smuggle refugees out of Nazi-occupied Marseilles. Looking back, he wrote that trade wars “undoubtedly sharpen national antagonisms. They also provide excellent opportunities for nationalist leaders to arouse popular resentment … International economic relations provide them with an excellent instrument to achieve their ends.”
During the first half of the 20th century, patriots around the world less and less felt, in Mill’s words, “the world their country.” America’s leaders learned the hard way that protection invites retaliation, and not only the economic kind. Imagine, for example, a tense encounter today between U.S. and Chinese naval forces in the Taiwan Strait: The difference between war and peace may well hinge on the mental state and persuasiveness of hard-liners on both sides angered by trade tensions.
In 1945, America’s leaders understood the importance of dismantling the previous decades’ tariff walls. The eventual result, Proposals for Expansion of World Trade and Employment, laid the foundation for today’s globalized economy. Its drafters, a disparate group of American officials led by Under Secretary of State for Economic Affairs William L. Clayton, shared Hirschman’s assessment of the 1930s trade war. They also realized that, with so many nations in shambles, they had “a limited and temporary power to establish the world we want to live in.”
Their labor yielded the backbone of today’s global order: the International Monetary Fund, the World Trade Organization, and the multiple General Agreement on Tariffs and Trade rounds that drove the worldwide tariff average of nearly 30 percent in 1945 down to about 5 percent today.
Economic historians have long known that free trade does not lift all boats. Trade’s bounty is diffuse and at times difficult to discern, but its costs, as experienced by European farmers in the 19th century and by American factory workers today, are concentrated and acute. A decade ago, research by the economist David Autor and his colleagues made clear that American communities most exposed to competition from Chinese imports had suffered higher unemployment, forced retirements, and increased health-care and disability costs. Conventional economic theory predicts that displaced workers will retrain or move to places with more jobs. Not so: Those who lost their jobs to Chinese competition rarely regained high-paying work; rather, they remained in place and either retired or collected disability payments. Autor’s recent update paints an even bleaker picture: Although employment eventually rebounded, it came from lower-paying service-sector jobs filled by the young and by immigrants.
David Frum: How Trump lost his trade war
Even so, the broad benefits of free trade, which accrue to an enormous share of the world’s population, far outweigh the concentrated harms. In that sense, the free-trade system is, as Winston Churchill quipped of democracy, the worst form of economics—except for all of the others that have been tried from time to time.
The potential for tariff-driven economic damage is, in fact, now greater than in the 1930s. Not only has the share of the world’s GDP flowing through trade tripled since then, but today’s complex supply chains, which see even T-shirts whizzing among continents multiple times before sale to consumers, add fragility to the world economy. And that’s the good news. As the dismal history of the 20th century’s first half demonstrated, the price of tariffs put in place by men who do not consider the world their country can mushroom far beyond mere accounting.
One key difference between the 1930s economy and today’s might prevent a full-blown trade war from erupting. In the era of Smoot-Hawley, only the wealthiest few percent of Americans owned stocks and bonds. Today, a large majority of workers and retirees own these assets in their 401(k) plans and IRAs, and are thus sensitive to protectionism’s economic threat. The past few months have seen stock- and bond-market ructions that vary with how seriously investors take the president’s tariff policies. The threat of interest-rate spikes and Dow shudders might explain why Trump has so far stopped well short of imposing the huge global tariffs he promised during his 2024 campaign, and why he backed away from the ledge in his first go-round with Mexico and Canada. During his first term, Trump was often mocked for equating the performance of the stock market with the health of the economy. During his second, that tendency might be what saves us all from catastrophe.
