The Cyclical Peril of Aggressive Tariff Strategies

Blog Post | 113 KY. L. J. ONLINE | November 29, 2024

 From Smoot-Hawley to Trump: The Cyclical Peril of Aggressive Tariff Strategies

By: Michael Kern, Staff Editor, Vol. 113 

In an era where global supply chains connect economies more intimately than ever before, the United States stands at a crossroads of trade policy.[1] “Promises made, promises kept,” serves as the proclaimed motto of President-elect Donald Trump’s term as the 47th President of the United States.[2] Trump has promised throughout his campaign to impose broader, more aggressive tariffs on foreign goods entering the United States.[3] An emphasis on tariffs marks a departure from decades of preference for free trade policies.[4]

From the nation's founding to present day, presidential administrations have used tariffs to generate revenue as well as to exert diplomatic pressure, though outcomes have been mixed.[5] The greatest successes occurred in the early period of our nation and more recent tariffs have seen increasingly negative outcomes as rapid globalization has taken over.[6] In the more globalized economy that we experience today, protectionist policies such as aggressive tariffs on imported goods can be used to signal American willingness to respond to unfair trade practices. Still, such broad tariffs will ultimately backfire by shrinking the American economy in the long term.[7] The greatest threats the United States will face from increased tariffs are increased inflation, decreases in the efficiency of domestic production and retaliatory tariffs on American made goods.[8]

Tariffs played a vital role in funding the early American government, serving as the primary revenue source before the introduction of federal income tax.[9] Congress soon began to expand the severity of tariffs on some imported goods, leading to a series of debates about the balancing of the ultimate goals of a tariff: inducing American consumers to purchase domestically made products sold at a higher price at the expense of decreased importation due to taxation.[10] Most notably, following the stock market crash of 1929, Congress passed the Smoot-Hawley Act, which raised average tariff rates by 60% almost overnight.[11] The move backfired catastrophically leading to an all-out trade war of retaliation amongst multiple nations.[12] As a result of Smoot-Hawley, overall world trade bottomed out from nearly $3 billion in January of 1929 to a mere $992 million in January only 4 years later.[13]

Despite Smoot-Hawley being recognized as a misstep, Congress could do little to repeal it as the Smoot-Hawley tariffs created a prisoner's dilemma: while the overall policy damaged international trade, individual industries clung to their protective rates, making repeal politically impossible despite widespread recognition of its harm.[14] Nearly a century later, as economic uncertainty looms, policymakers appear poised to ignore these hard-learned lessons.[15] With multiple tax cuts expected and tariffs being a suggested offset for the expected loss of revenue, President-elect Trump is prepared to garner support for Congress to make the same missteps again.[16]

The United States Constitution grants Congress the power to levy tariffs on imported goods. The establishment of a federal income tax shifted the role of tariffs from that of a revenue source into a foreign policy tool that is primarily used by the office of the President.[17] Congress has also given the President power to adjust tariffs, such as through section 232 of the Trade Expansion Act of 1962, which grants the President power to alter tariffs on imports that threaten our national security. [18] Other grants from Congress have given the President powers to simply impose tariffs on all imports in times of war or great emergencies.[19] All of this is to say that there are few barriers at this point to prevent the President from exercising broad authority over tariffs on imported goods even without any need for formal legislation or support by Congress.

Although we may wish to signal American resolve against unfair trade practices, many experts agree that tariffs harm the national economy and are borne most heavily by domestic consumers by making them “effectively poorer because prices are higher.”[20] While tariffs directly increase foreign goods' prices, with the extra costs being borne by consumers, they also allow domestic producers to raise prices without yielding any market share.[21] This compounding effect on consumer costs makes the economic impact particularly severe. Estimates from the Tax Foundation have suggested that Trump’s proposed tariff hikes will reduce GDP by at least 0.8% costing the United states 684,000 jobs.[22] Another major concern is that the US inflation rate will rise quickly both with or without retaliation from other nations with estimates as high as a 1.3% rise above baseline in 2025.[23] Ultimately, evidence suggests that tariffs impose greater costs on the economy relative to many other public policies.[24]

The economic realities of our interconnected global economy make broad tariffs an increasingly dangerous tool. Rather than protecting American interests, the proposed expansion of tariffs threatens to repeat past mistakes by increasing inflation, reducing GDP, eliminating jobs, and potentially triggering retaliatory measures from trading partners. As such policymakers would be wise to learn from historical lessons and seek more nuanced approaches to addressing trade concerns that don't risk such significant domestic economic harm.

[1] Lynn Parramore, Why Global Supply Chains Remain Vulnerable, Inst. for New Econ. Thinking (July 2, 2024), https://www.ineteconomics.org/perspectives/blog/why-global-supply-chains-remain-vulnerable.

[2] Donald Trump, President-elect, Victory Speech for the 2024 Election Cycle (Nov. 6, 2024).

[3] Paul Wiseman, Trump favors huge new tariffs. How do they work?, PBS News (Sep. 27, 2024, 11:35 AM), https://www.pbs.org/newshour/economy/trump-favors-huge-new-tariffs-how-do-they-work.

[4] Tyler Halloran, A Brief History of Tariffs in the United States and the Dangers of their Use Today, Fordham J. of Corp. & Fin. (Mar. 17, 2019), https://news.law.fordham.edu/jcfl/2019/03/17/a-brief-history-of-tariffs-in-the-united-states-and-the-dangers-of-their-use-today/.

[5] Id.

[6] Id.

[7] Erica York, How Will Trump’s Universal and China Tariffs Impact the Economy?, Tax Found. (Nov. 8, 2024), https://taxfoundation.org/blog/trump-tariffs-impact-economy/.

[8] Council of Economic Advisers, Tariffs as a Major Revenue Source: Implications for Distribution and Growth, Council of Econ. Advisers (July 12, 2024), https://www.whitehouse.gov/cea/written-materials/2024/07/12/tariffs-as-a-major-revenue-source-implications-for-distribution-and-growth/.

[9] Phillip W. Magness, The Problem of the Tariff in American Economic History, 1787–1934, CATO Inst. (Sept. 26, 2023), https://www.cato.org/publications/problem-tariff-american-economic-history-1787-1934.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Gavin Bade, Lighthizer and his allies lay groundwork for Trump’s massive new tariffs, Politico (Nov. 12, 2024, 4:51 PM), https://www.politico.com/news/2024/11/12/lighthizer-trump-new-tariff-plan-00189114.

[16] Id.

[17] Christopher A. Casey, U.S. Tariff Policy: Overview, Cong. Rsch. Serv. (Oct. 3, 2024), https://crsreports.congress.gov/product/pdf/IF/IF11030.

[18] Id.

[19] Id.

[20] Andrew Chatzky, Anshu Siripurapu & Noah Berman, What Are Tariffs?, Council on Foreign Rel. (June 21, 2024, 12:30 PM), https://www.cfr.org/backgrounder/what-are-tariffs.

[21] Id.

[22] Erica York, Tariff Tracker: Tracking the Economic Impact of the Trump-Biden Tariffs, Tax Found. (June 26, 2024), https://taxfoundation.org/research/all/federal/tariffs/.

[23] Warwick J. McKibbin, Megan Hogan & Marcus Noland, How much would Trump's plans for deportations, tariffs, and the Fed damage the US economy?, Peterson Inst. for Int’l Econ. (Sept. 26, 2024, 5:00 AM), https://www.piie.com/blogs/realtime-economics/2024/how-much-would-trumps-plans-deportations-tariffs-and-fed-damage-us.

[24] Pablo D. Fajgelbaum & Amit K. Khandelwal, The Economic Impacts of the US–China Trade War, 14 Ann. Rev. of Econ. 205, 222 (2022).