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Tariffs
A history of US tariffs and their outcomes.
Nick Tomas
March 06, 2025 • Estimated Reading Time: 14 minutes
Table of Contents
Tariffs, tariffs, tariffs, man. Everybody’s talkin’ ‘bout ‘em.
And you know what that means? A whole lotta folks runnin’ their mouths without a clue to what’s actually goin’ on. Just parroting whatever their favorite talking heads fed ‘em.
But not us. No way. We’re about to take the scenic route, the road less traveled, the one with the truth at the end of it.
Let’s break it down, separate the facts from the fiction, and get you looking sharp the next time this topic comes up.
Trade Deficits Explained
Tariffs and trade deficits often go hand in hand in economic discussions. So let’s begin there:
A trade deficit happens when a country imports more than it exports. This can have both advantages and disadvantages, especially when a powerful nation like the U.S. trades with smaller economies.
The Benefits of Trade Deficits
Lower Costs for Consumers: A trade deficit allows a country to import goods at lower prices, which can help keep inflation rates reduced and improve the standard of living.
More Consumption, Higher Living Standards: By importing more than it produces, the deficit-running country can sustain higher levels of consumption.
Foreign Investment & Economic Growth: Trade deficits often lead to foreign investment in the deficit country, helping to stimulate economic growth. Economic growth leads to more jobs available and more opportunities for upward mobility.
Global Economic Stability: When a major economy like the U.S. runs a trade deficit, it injects liquidity into the global financial system, which helps stabilize economies worldwide.
Diplomatic & Strategic Influence: The larger country gains economic leverage over its trade partners, which can be useful in negotiations and international relations.
Capital Inflows & Currency Demand: Trade deficits are often balanced by foreign capital investments, which can finance domestic projects and government spending. In the case of the U.S., it also maintains global demand for the U.S. dollar as a reserve currency.
The Costs of Trade Deficits
Job Losses in Key Sectors: Countries that import more than they export can see job losses in some industries, especially in manufacturing.
Currency Risks: Persistent deficits can weaken a nation’s currency over time, although other economic factors may offset this effect.
Foreign Ownership of Domestic Assets: Long-term deficits mean foreign investors gain control over more U.S. businesses and industries.
Declining Competitiveness: Some industries struggle to recover from prolonged exposure to foreign competition, reducing the country’s ability to produce key goods.
Strategic Vulnerabilities: Over-reliance on imports, particularly for critical goods like steel, aluminum, and agricultural products, can be a national security risk.
The National Security Factor
There’s a strong argument for ensuring the U.S. maintains domestic production of essential goods. In times of war or crisis, waiting to ramp up production could be disastrous. That’s why subsidies exist. As they ensure that critical industries (steel, aluminum, etc) remain operational, even if they aren’t always profitable in normal times. History has shown that great civilizations often fall due to overconfidence. Ignoring strategic production needs at times of peace could be a costly mistake.
The Reality of Trade for the U.S.
While protecting key national security industries is important, free trade also offers undeniable benefits. The U.S. cannot produce everything it needs at the scale required to sustain its economy. A trade deficit is, in many ways, a natural byproduct of being a global economic superpower.
Some see trade deficits as a weakness, but in reality, they reflect the strength of the U.S. economy, and its ability to consume, invest, and attract global capital. It’s an arrangement that may come with trade-offs, but in the grand scheme of things, it’s a deal worth taking.
The United States is an extraordinary place to live. I may be biased, but I’d say the best in history. And like anything of great value, maintaining it comes at a cost. But it’s still a trade I’d make every day of the week, and twice on Sunday.
The History of Tariffs in the United States
In his book Clashing Over Commerce: A History of US Trade Policy, Douglas A. Irwin outlines three distinct phases of U.S. tariff policy, tracing how it evolved from a survival mechanism in the country’s early days to a tool for economic dominance.
(And yes, I’m actually reading the book. Which means, “yes,” I am a closeted nerd… But don’t get it twisted, I can still kick your ass. At least most of you… Maybe… Whatever. Shut up. Lol.)
Here’s a breakdown of the three major phases of U.S. trade policy:
Part I: Tariffs for Revenue (1789-1865)
In the early years of the United States, tariffs were the government’s primary source of income. Before the introduction of the income tax, tariffs on imported goods funded most federal operations. In the 1800s, these tariffs could make up as much as 2.5% of GDP. Back then, they weren’t primarily about protecting domestic industries, they were about keeping the government running.
This era came to an end after the outcome of The Tariff Act of 1890, also known as the McKinley Tariff. Which was a significant piece of protectionist legislation in U.S. history:
The McKinley Tariff of 1890
The era of high tariffs reached a turning point with The Tariff Act of 1890, better known as the McKinley Tariff. This was one of the most aggressive protectionist policies in U.S. history, designed to shield American industries from foreign competition.
Key Provisions of the McKinley Tariff
Tariff Hike: The act raised the average import duty from 38% to nearly 50%, the highest level in American history at the time.
Selective Exemptions: While it increased duties on many goods, it eliminated tariffs on certain imports like sugar, coffee, tea, and hides.
Protection for American Workers & Industries: A key Republican campaign promise, the tariff aimed to boost domestic manufacturing and safeguard jobs. (Sound familiar?)
The Consequences of the McKinley Tariff
Higher Prices for Consumers: With foreign competition restricted, U.S. businesses raised prices on domestically produced goods. Many American families found essentials becoming unaffordable.
A Heavy Burden on Farmers: Farmers, who relied on imported machinery and supplies, were hit especially hard by rising costs.
International Retaliation: Other countries responded by imposing high tariffs on U.S. exports, making it harder for American businesses to sell abroad.
Political Backlash: The tariff was deeply unpopular. In the 1890 congressional elections, Republicans suffered massive losses, signaling public frustration.
Short-Term Gains for Some Industries: Certain sectors, like tinplate production, saw rapid growth under protectionist policies. However, the overall economic cost to consumers far outweighed those benefits.
The McKinley Tariff’s Short-Lived Impact
The backlash was swift. As support for the tariffs, at least in part, cost Benjamin Harrison his re-election bid two years later in 1892.
In 1894, the Wilson-Gorman Tariff Act was passed, reducing many of the McKinley Tariff’s rates. While the 1890 tariff did protect some American industries, it ultimately proved too costly for consumers and farmers, shining a light on the challenges of extreme protectionism.
Part II: Restriction/Protectionism (1890 - Pre-WWII)
By the early 20th century, tariffs took on a new role of shielding domestic industries from foreign competition. The peak of this protectionist era was the Smoot-Hawley Tariff Act of 1930. While the goal was to protect American jobs., it instead resulted in a global trade war that worsened the Great Depression.
The Disaster that was The Smoot-Hawley Tariff Act:
The Smoot-Hawley Tariff Act, officially known as the United States Tariff Act of 1930, was one of the most infamous trade policies in American history. Sponsored by Senator Reed Smoot and Representative Willis C. Hawley, the law aimed to protect American industries by raising import duties on over 20,000 foreign goods. President Herbert Hoover signed it into law on June 17, 1930.
The severe consequences of Smoot-Hawley Tariff Act:
A Global Trade War: Other countries retaliated by imposing their own high tariffs on U.S. goods, drastically reducing American exports.
Plummeting Trade: U.S. exports fell from $5.2 billion in 1929 to just $1.7 billion in 1933. Trade with Europe collapsed, declining by nearly two-thirds between 1929 and 1932.
Devastation for Farmers: American agriculture was hit hard yet again by high tariffs. With fewer exports, crop prices plunged, and many farmers defaulted on their loans.
Bank Failures: Rural banks, already under pressure, collapsed as farmers defaulted, worsening the financial crisis.
Global Economic Fallout: The tariff didn’t just hurt the U.S.; it deepened the economic downturn worldwide, dragging other economies further into depression.
Stock Market Reaction: A Clear Warning
The stock market immediately recognized the danger of the Smoot-Hawley Tariff and sold off in response.
June 16, 1930 (one day before the bill passed): The Dow Jones dropped 7.9% in a single session.
Before the law even passed, stocks had already started declining. The Dow fell 2.55% from March 1929 to June 1929, when the bill cleared the House.
After Hoover signed it into law, stocks continued their decline, falling another 26.7% from June 1929 to July 1930.
Foreign investors pulled out, accelerating capital flight and worsening market losses.
While the Smoot-Hawley Tariff Act is often associated with the stock market crash of 1929, it's important to note that the crash occurred before the act was passed. However, the act undoubtedly contributed to the prolonged economic downturn and stock market weakness in the early 1930s.
While the Smoot-Hawley Tariff was meant to protect American businesses, it instead crippled trade, hurt farmers, caused bank failures, and worsened the Depression. It remains a classic example of how protectionist policies, when taken too far, can backfire and turn an economic downturn into a full-blown crisis.
Part III: The Era of Reciprocal Trade (Post-WWII – Present)
After World War II, the U.S. took a different approach; reciprocity. Instead of raising tariffs unilaterally, the U.S. sought mutual agreements to lower trade barriers, fostering global economic cooperation. This led to major trade agreements like GATT (General Agreement on Tariffs and Trade) and later the WTO (World Trade Organization), helping to expand global trade and solidify the U.S. as an economic powerhouse.
GATT and WTO: Shaping Global Trade
Two of the most important institutions in international trade are the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO). Their goal? To make global trade freer, fairer, and more predictable.
GATT: Laying the Groundwork for Free Trade (1947-1994)
Established in 1947 with 23 founding members
Created to reduce tariffs and other trade barriers through negotiations
Key principle: "Trade without discrimination" (Most-Favored-Nation clause)
Impact: Slashed average tariffs from over 20% to around 5%
Functioned as a de facto global trade organization but lacked enforcement power
WTO: The Next Step in Global Trade (1995-Present)
Replaced GATT on January 1, 1995
Now has 166 member countries, representing most of the global economy
Expanded scope: Covers not just goods, but also services and intellectual property
Key functions:
Administers and enforces trade agreements
Provides a forum for trade negotiations
Settles disputes between member nations
Reviews national trade policies
Assists developing countries in navigating global trade rules
The transition from GATT to WTO was a game-changer, giving the world a more structured and enforceable system for international trade. While GATT laid the foundation, the WTO brought stronger governance, broader coverage, and real enforcement power, shaping the modern global economy. Bringing with it decades of unprecedented prosperity and a drastic decline of global poverty.
Of course, this came at some cost to the US as our deficit as a percentage of GDP grew a little bit. But hey, when it was higher in the 1970s the economy sucked. Meaning that a higher deficit as a percentage of GDP does not equal more prosperity or a better economy.
While not reflected in the chart above as it only goes to 2022, the most current trade imbalance as a percentage of GDP available is -4.2% as of Q3 2024.
That’s a bit to digest, so we will leave it there for now and pick up the current tariff situation and likely outcomes in the next post.
As always, it’s crucial to understand the past to try and decipher what will happen in the future.
But one thing is clear: We have been here before and it never ended well once the US became a developed country.
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