A tariff is a tax levied on a product when it crosses national boundaries. Accordingly, tariffs are antigrowth in that someone has to pay this added tax cost - either the manufacturer, the exporter, the importer, the retailer, or the consumer, but most of the tariff is paid by the consumer because the other four parties cannot stay in business long if they are forced to absorb the additional deadweight loss of the tariff.
This post shows the impact tariffs have on prices, competitiveness, costs, jobs, currencies, the trade deficit (imports of goods & services are greater than exports or we buy more than we sell), the budget deficit (government's spending exceeds its revenue typically for a fiscal year), savings (the portion of disposable income not spent on consumption), & surplus savings (the excess money left over after all expenses & debts have been paid).
During the period 1500 to 1800 mercantilists sought to promote their own interests by invoking high tariff protectionist barriers on imports & relying on net payments from the rest of the world in the form of gold & silver to pay for their exports. This protectionist strategy was carried to the extreme when mercantilists followed the "beggar thy neighbor" policy in which the tariff imposing country's economic gain was thought to only be achieved by making other countries poorer. The idea was that earning & hoarding trade money was where the wealth was rather than in enjoying & using the material goods & services that made life easier. Even though this theory had been proven to be wrong, many countries during the Great Depression adopted beggar thy neighbor policies leading to a collapse of international trade. Today mercantilist policies like Trump's don't look to hoard gold & silver like in the earlier period - their beggar thy neighbor policy emphasizes the growth of the domestic worker labor force @ the expense of foreign countries. This post also addresses the problem with this.
When the Constitution took effect in 1789 with the unanimous electoral college victory of George Washington as President & the Senate's unanimous confirmation of Alexander Hamilton as Treasury Secretary in literally "just minutes" Hamilton's work of establishing the nation's financial system began. Hamilton's first report to Congress concerned government expenses & the need for strong national credit.
To pay for government expenses including the debt incurred financing the Revolutionary War Hamilton prepared a schedule of tariffs & excise taxes on such commodities as alcohol, carriages, sugar, & tobacco. These were the only sources of revenue in 1789 (90% came from tariffs) - but this tax system did follow supply-side economic principles that fuel economic growth in that both government expenses & taxes were kept low thereby minimizing government's claims on earned income with the country working under the sound money policy of the Gold Standard. The Tariff Act Of 1789 was the first national source of revenue for the United States passed by Congress - it taxed imports to America @ 5% to 15%.
Tariffs can be used to 1) raise revenue, 2) protect domestic industries from foreign competition, & 3) make reciprocal agreements between nations to lower tariffs when they have gotten totally out of hand. Hamilton's purpose was solely to raise revenue because other than shipbuilding there was little domestic industry to protect, & American tariffs were so low there was nothing to negotiate with other countries (i.e., 2 & 3 above did not apply to America in 1789). The use of tariffs to raise revenue spanned the years 1789 to 1861 (start of the Civil War) followed by the period of the Civil War to the Great Depression that used tariffs to restrict imports to protect domestic producers. The reciprocal agreements use of tariffs followed the Great Depression & includes such things as the North American Free Trade Agreement (NAFTA) & its successor the United States-Mexico-Canada Agreement (USMCA) as well as the World Trade Organization (WTO) founded on January 1, 1995 being evolved from the General Agreement on Tariffs & Trade that had been established in 1947 in Geneva when 23 countries met & recognized how counterproductive the trade & tariff policies of the 1930s had been.
Budget deficits (i.e., debt) are used to move production ahead which is most beneficial to countries in times of war (through the selling of bonds to pay for the cost of the war) & to people in buying a house through the terms of a mortgage. Check out the following graphic (the curve traces debt as a % of GDP) that shows Hamilton's intention to pay down the initial debt thereby establishing excellent credit for the new nation. All of the Founders followed suit & the graphic below shows that following the plan of James Monroe (our best president), in 1835 the national debt was extinguished in absolute dollar terms, not just as a % of GDP, for the one & only time in the nation's history or for that matter the only time in world history that a major country was without interest paying debt. America lost its top-tier triple-A credit rating first in 2011 by S&P, then by Fitch in 2023, & finally by Moody's on May 16, 2025. Our Founders would be very sad.
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After the War of 1812 industry increased very rapidly in the North, & northern voters began to lobby Congress for higher tariffs to protect their industries & manufacturing jobs. The South remained almost entirely agricultural & southern voters preferred low tariffs to keep the cost of their imports down. See graphic below (click on it to enlarge) that shows the U.S. Average Tariff Rates (1821 - 2016).
In the northern states industries became ever more efficient in their use of labor so that productivity (output per man hour) increased leading to economic growth & higher standards of living. Accordingly, tariff protection became less necessary & tariffs trended down until the start of the Civil War. This 30 year period of decreasing tariffs was one of high economic growth.
Following the Civil War there was another strong demand to return to protective tariffs to ward off foreign competition eliminating American jobs & to pay down the enormous war debt. Accordingly, tariffs stayed elevated for the next 40 years. But tariffs are a regressive tax that affects the poor the most (i.e., their first dollar is taxed buying necessities) & by 1900 the poor got relief by the lowering of tariffs from above 50% in 1900 to under 20% by 1920.
The "roaring twenties" roared for the American economy but not the agricultural sector which had been very prosperous during World War I but weakened when European farmhands, who had been soldiers during the war, returned to farming after the war thereby raising the worldwide food supply. A severe Midwest drought exacerbated a declining agricultural sector & rural banks failed @ a rate of 500 per year during the 1920s. Mechanical technology advancements in automobiles & tractors also helped increase the food supply, sending farmers' prices even lower.
Once again protective tariffs were thought to be the answer to the farmers' problems. But before President Herbert Hoover (presidents were inaugurated in March in those days) could work out tariff details with Congress the stock market crashed & the economy was moving into a recession. Over the course of four business days - Black Thursday (October 24) through Black Tuesday (October 29) - the DJIA dropped 25% from 305.85 to 230.07.
The causes of the stock market crash were many - the farmers' price & supply problem itself as well as overinflated shares, growing bank loans, panic selling (note that nobody really jumped out of windows of tall buildings), stocks purchased on margin, higher interest rates (always the adversary of the stock market), & a negative media industry. (The DJIA hit its bottom on July 8, 1932 just a few days after FDR won the Democrat primary on an anti-tariff platform. The DJIA had dropped from its high of 381 in September, 1929 to 41 in July, 1932.)
The 1929 stock market crash in turn caused virtually every industry & entire economic sectors, not just agricultural, to call for protective tariffs & on June 17, 1930 Hoover signed the Smoot-Hawley Tariff Act into law that dramatically raised tariffs on 20,000 imported goods with the highest tariffs on imported agricultural products.
Both the farmers' problems & stock market crash described above were the start of an economic downturn that was exacerbated into the Great Depression by the enactment of the Smoot-Hawley tariffs coupled with the high reciprocal tariffs imposed by foreign countries plus the woeful mishandling of monetary matters by the Federal Reserve System that had only come into existence in 1913. Another negative was Hoover, trying to balance the budget, signing the Revenue Act of 1932 that raised the top individual income tax rate from 25% to 63% while broadening the base, & raised the estate tax from 20% to 45%, & the corporate income tax from 12 to 13.75%. The resulting Depression proved that a government cannot tax or tariff its way to prosperity.
In response to Smoot-Hawley foreign countries reciprocated with their own high tariffs & world trade collapsed falling 67% by 1932 while American exports fell 78% during this same time. See graphic below - click on it to enlarge.
Professor Friedman determined that from July 1929 to March 1933 that the money stock fell by one third & that two thirds of that decline came after England went off the gold standard in September 1931 (an act that preceded & followed gold withdrawals from the U.S.). After more than two years of economic contraction starting in 1929 the Fed raised the discount rate - the rate it charges to Member banks - to arrest the gold drain. Money income declined by over half & prices by over one third during this period meaning that even with price deflation there was a real decline in purchasing power for many workers - which in turn caused companies to produce less, raising the unemployment level. Thanks to the trade war foreign countries were having similar problems & could not bail America out by buying our products even @ these reduced prices. Unemployment in America reached 24.9% (12,830,000 people) @ its peak in 1933 meaning a large portion of the workforce had no income @ all. By 1940 the unemployment rate was still 14.6% - what a period of misery. See graphic below - click on it to enlarge.
I calculate that relative to July 1929 that prices stayed in a deflationary state until March-April 1943.
So what ended the great depression? One thing for sure, it was not World War ll. To produce wealth a country needs to make things of value. At the end of the war there was nothing but destruction for much of the world & the United States was @ a record debt level. See graphic below - click on it to enlarge.
Following the Japanese surprise military strikes on the U.S. naval base @ Pearl Harbor on Oahu, Hawaii in 1941 defense spending (i.e. government spending) tripled in 1942 & the U3 unemployment rate fell from 9.9% in 1941 to 4.7% in 1942. It stayed below 2% throughout the war. But America was not in a jobs program that you would find in a normal free market economy - we were in an all-out wartime economy that was being financed by the tremendous debt shown on the graphic above. Had we continued in the same way as before the war we would have gone back to the misery of the 14.6% unemployment rate of 1940 but now even worse we would have been in debt up to our eyeballs.
The Great Depression ended by reversing the man-made economic mistakes of 1929 to 1933. Please look @ the above graphic showing the historical U.S. average tariff rates. Following the high Smoot Hawley tariffs in 1930 the tariffs on dutiable imports had dropped from near 60% in 1930 to just over 30% by 1942 & to 13% by 1950. Following a one third contraction during the worst years of the Depression the Fed increased the money supply from $31 billion in 1933 to 70 billion in 1942. See graphic below.
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Following the war the federal government reduced government spending from its peak in 1944 by 75% by 1948 thereby bringing federal spending to 8.9% of GNP in 1948 from 44% of GNP in 1944. With government spending reduced, investors had more savings & surplus savings to put into peacetime production industries & consumer goods factories resulting in private investment increasing by 28.6% by 1946. As America shifted from a wartime economy of rationing & restrictions to a peacetime production economy Americans were eager to purchase consumer goods using either money they had earned & saved from their deficit financed wartime employment or establishing their own credit. Between 1945 & 1949 Americans purchased 20 million refrigerators, 21.4 million cars, & 5.5 million stoves - a period of tremendous personal consumption growth. Americans were now back in the ball game of living.
This period of economic growth has now extended about 80 years from the 1940s to today. Robert Rector of the Heritage Foundation sums up America's standing in the world as follows: "Current poverty has little resemblance to poverty 50 years ago. According to a variety of government sources, including census data and surveys by federal agencies, the typical American living below the poverty level in 2013 lives in a house or apartment that is in good repair, equipped with air conditioning and cable TV. His home is larger than the home of the average non-poor French, German or English man. He has a car, multiple color TVs and a DVD player. More than half the poor have computers and a third have wide, flat-screen TVs. The overwhelming majority of poor Americans are not undernourished and did not suffer from hunger for even one day of the previous year."
So much of our misery started in 1913 with both the enactment of the income tax system & the creation of the Fed. Long time readers of this blog know that I would like to replace the income tax system with the FairTax plan & have the Fed adopt a market-based approach for setting interest rates - i.e., The Fed should allow interest rates to be determined by supply & demand market forces rather than through their direct intervention & control. Currently the Fed sets interest rates that really is a form of price control that impedes the natural price discovery in the market. I am for a return to the Gold Standard & the sound money it ensures. And like Professor Friedman taught, a country that sets high tariffs only gets poorer - if someone is willing to sell you something cheaper than you can make it yourself buy it with the most stable dollar possible. Following these points would have avoided the Great Depression as well as much of our problems the past 96 years.
One of the main takeaways hereinbefore is that tariffs coupled with possible foreign country retaliatory tariffs are dangerous - @ a minimum tariffs exacerbated an economic downturn into the Great Depression. Congress is irresponsibly & unconstitutionally letting Trump play with fire by imposing tariffs on virtually every country in the world for dubious & suspect reasons - an unchecked power never authorized to any one man by the Constitution. A president does not have the unilateral authority to impose the volume of tariffs Trump is considering based on arbitrary & controversial interpretations of laws that he is relying on like the International Emergency Economic Powers Act of 1977 (IEEPA) that allows the president to impose sanctions, embargoes, & other economic measures to address threats to national security during a declared emergency. Trump has abused this limited authority under IEEPA by imposing reciprocal tariffs on a wide range of imports because he thinks both allies & enemies participate in perceived unfair trade practices that result in trade deficits - yet America has run trade deficits for the past 50 consecutive years while becoming the wealthiest country in the history of the world. What emergency? The Court of International Trade (CIT) has struck down many of Trump's tariffs, seeing them as an unconstitutional stretch that the law never intended. The CIT decisions were stayed pending Trump's appeal to the Supreme Court - if the CIT rulings are ultimately upheld, importers have a strong claim for refunds for tariff duties paid under the IEEPA-based tariffs.
See graphic below of tariff schedule Trump presented on what he termed "Liberation Day," April 2, 2025.
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Upon presentation of the above graphics on April 2 the S&P 500 fell 19% (within 1% of the definition of a bear market) from its previous high in February to its 2025 low on April 8. Similar moves with the DJIA & the NASDAQ were registered. All of the indexes recovered every time Trump paused the tariffs or reduced some of them to the point that the markets believed that Trump would not go ahead with them. The Financial Times' columnist Robert Armstrong referred to this observation as TACO meaning "Trump Always Chickens Out." The idea is that Trump will back off when his tariffs cause the American people pain either through higher consumer prices or lower 401(k)s.
On again, off again, on again tariffs include products like cars, chemicals, pharmaceuticals, machinery, steel imports (25% of U.S. steel consumption is imported) & aluminum imports (50% of aluminum consumption is imported). Note from the above graphic that some of the poorest countries in the world have the highest tariffs on imports - Vietnam 90%, Cambodia 97%, Laos 95%, Madagascar 93%, Sri Lanka 88%, Burma 88%, & all @ 74% Bangladesh, Serbia, & Botswana. Conversely, for the past 75 years the U.S. has had some of the world's lowest tariffs while simultaneously being the top-ranked global economy. Trump has an enduring belief that even poor countries rip us off - like Guatemala with a $6,000 per capita GDP & duty free exports of bananas, coffee, & T-shirts will now be charged a 10% tariff. We're not just fooling around with bananas & coffee but with peanuts & all the aggravation that comes with it.
The above table shows Trump plans a 46% tariff for Vietnam imports to America to balance trade between the two countries. Vietnam has an annual real GDP per capita of $4,000 in 2023 dollars. The average hourly wage is less than $2 per hour & the minimum wage is less than $1 per hour. Just what of any significance does Trump think Vietnam is going to buy from us?
In 2018 Trump provided two narrow illustrative examples of the effects of foisting tariffs when he imposed a 25% tariff on steel & a 20% to 50% tariff on washing machines.
In the case of the steel tariffs of 2018 there was an increase of 8,700 jobs in the U.S. steel industry accompanied by higher wages in the metals industry. But there was a loss of 75,000 jobs in the downstream manufacturing industries that used steel as a raw material in their production processes as these industries became less competitive due to higher costs - steel prices increased nearly 9% costing the steel users in downstream industries $5.6 billion. The Peterson Institute for Applied Economics calculates that each steel job created cost $650,000.
In the case of the washing machine tariffs of 2018 Trump, @ the request of Whirlpool who was looking for protection from foreign competition, imposed a 20% tariff on the first 1.2 million foreign washing machines & 50% on subsequent imports the first year with gradual reductions the next two years (18/45% & 16/40% respectively). The tariffs resulted in the creation of about 1,800 jobs, mostly @ Whirlpool's facility in Ohio & new factories built by Samsung in South Carolina & LG in Tennessee. But the tariffs increased consumer costs by about 12% ($86 to $92 per machine, sometimes including dryers which were sold as a pair by some dealers) that totaled $1.5 billion annually. Tariff revenues to the Treasury came to $82 million. The American Enterprise Institute (AEI) calculates that each appliance job created cost the American consumer $820,000 or 19 times the average pay of U.S. manufacturing workers.
Note that the tariffs on washing machines led to higher prices for both imported & domestic washing machines, i.e., it didn't matter where the machines were made, prices increased as the competition was eliminated - a feature of tariffs that is true for all products & services. It is only natural for the protected industry to raise their prices to @ least just below the tariff rate. This is the anticompetitive feature of tariffs - once the foreign competition is removed domestic prices go up.
AEI presented the table below based on the work of Gary Clyde Hufbauer of the Peterson Institute that provides a more comprehensive summary of 26 different case studies of trade protection in the U.S. that all confirmed the results of the steel & washing machine examples detailed above. The average annual cost to consumers per job saved in the table below was over $500,000 in 2016 dollars. In addition, a study by Scott Lincicome of the libertarian Cato Institute found that the average annual cost to American consumers per job saved or created by tariffs from 1950 to 1990 was nearly $810,000 in 2025 dollars.
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In addition to the above please recall Trump's first foray in his first term into an agricultural products trade war that resulted in more than $27 billion in losses of agricultural exports in which China started buying more soybeans from Brazil. Trump reimbursed farmers $23 billion but farmers have yet to regain their market share.
So with America's terrible experience with tariffs what are we doing toying with them again.
Trump's reasoning is conflicted - he says his tariffs will generate enough revenue to replace the income tax but tariffs were used most effectively before there was an income tax system & the federal government was much smaller than today's (in 1900 the total federal budget was about 2% of GDP & today's budget deficit is between 2 & 3 times as big as the entire budget was then); next he says that high tariffs will protect American workers meaning that revenue from tariffs will decrease thereby thwarting the income tax replacement idea; & finally he says he is using tariffs only as a negotiating tool to get foreigners to lower their tariffs which could have just the opposite effect like it did in the 1930s.
Note that Trump is using tariffs for more than trying to balance trade matters - the most recent case in point is Trump threatening Brazil with 50% tariffs if it doesn't stop the trial of former president Jair Bolsonaro. Other non-trade tariff threats have been made against Columbia, Canada, Mexico, China, Japan, South Korea, & countries that buy oil from Venezuela. In the case of Brazil the United States runs a $7 billion trade surplus.
But do we want these manufacturing jobs returning to America in the first place? These jobs represent our past, not our future. Call center jobs are done in the Philippines, Jamaica, & India. The buggy whip business is extinct other than in Amish country.
The purpose of Industrial Engineers & time study experts is to simplify & streamline manufacturing processes so that productivity increases are realized that result in real wage gains for employees who add value to their jobs & companies so that real GDP per capita - currently $68,833 in 2017 dollars, a good measure of our standard of living - can keep increasing.
To understand how value producing jobs are created, think of the world economy as a ladder - a metaphor presented to me several years ago by Professor Robert Carbaugh of Central Washington University. The U.S. is currently on the top rung & developing nations with low tech labor intensive jobs are on the bottom rungs. The other countries are in between. All countries try to climb to the next rung. This works well if the topmost countries create new industries & products, thus adding another rung to the ladder like when we replaced horse drawn carriages that used buggy whips with cars. Older industries can move overseas while new jobs are generated @ home. It is when innovation stalls @ the highest rung that the portion of Americans near the bottom of the income distribution must compete with workers in developing countries. This is what many of the people - the unemployed & underemployed, the discouraged, & the marginally attached to the labor force - are facing today being poorly educated with skills so limited that no employer can use them. It is only through constant brainwashing that the government will take care of you that would allow someone to become so ill-prepared to support themselves that they are now competing with third world people who make pennies a day.
But who is going to do these manufacturing jobs? Where will the people come from? Forty-three percent of U.S. manufacturers can't find people to fill existing job openings now according to the results of the National Federation of Independent Business Questionnaire. It is not the dream job of American youth to work in a factory or field - only 8% of American workers are now employed in manufacturing, down from 22% in 1975 when it was far less efficient & much less mechanized. I have presented several posts the past few years detailing the worker shortages, both current & future, in America in fields like medical, pharmacy, accounting, & engineering - now add shortages of manufacturing workers to the list. Mass deportations of employed illegal immigrants does not help the shortage - but that's another matter. And on a very personal note - our local pool closed one day over the Independence Day holiday weekend because there was a shortage of lifeguards. We are not returning to excellence - we are coasting uphill after losing much of our prior momentum.
Right in line with worker shortages, is the fact that the trade deficit is the result of Americans consuming more than they produce. Since our consumption exceeds our available funds a need for foreign capital is created.
Just as the sound wave of thunder is always produced following the rapid expansion of air due to lightning's intense heat, a trade deficit always has a flip side known as a capital surplus. Just as lightning is the event & thunder is the consequence a trade deficit is the event & the capital surplus is a natural consequence.
If America has a trade deficit our trading partners have a capital surplus meaning they have in their possession the dollars used by American importers to buy the foreign currency needed to complete the trade transaction. When our foreign trading partners buy American assets (stocks, bonds, treasuries, or real estate) they are effectively financing our trade deficit. If trade was balanced between the two trading partners the dollars would be regarded as the money the foreigner earned to buy American products if they existed, & since they don't exist there is a trade deficit.
There are many variables that go into complex calculations to see the effects on international trading such as savings rate of a country, budget deficits, interest rates, & currency fluctuations (e.g., when America imposes tariffs the dollar gets stronger because America buying fewer foreign goods reduces demand for that foreign currency which in turn makes American exports priced in dollars more expensive.)
In summary, tariffs are additional costs of doing business that have to be paid once imposed. Most of this burden falls on the consumer. Trump says he is imposing tariffs for national security-emergency reasons using far fetched interpretations of laws meant for specific limited purposes - not to remake the wealthiest economy in world history. It was only after reducing tariff rates to the lowest in the world, starting in the 1940s, did America's superior wealth status really come about.
Instead of imposing reciprocal tariffs on our trading partners & inflicting harm on our consumers, America should refrain from imposing tariffs & concentrate on importing those goods & services in which it has an absolute &/or comparative cost disadvantage & exporting those goods & services in which it has an absolute &/or comparative cost advantage.
Thomas Sowell explained on page 349 of his classic book Basic Economics that "International trade is not a zero-sum contest between nations, but a wide array of voluntary transactions between individuals living in different countries, who must all gain if these transactions are to continue. International trade is just one more way of getting more output from scarce resources which have alternative uses."
