WASHINGTON -- Tariffs are having a moment right now.
After decades of being avoided as an economic policy in the United States, the tax on imports are back on the rise. This was illustrated Friday morning, when the administration of President Donald Trump raised tariffs on $200 billion worth of Chinese imports from 10 percent to 25 percent. Immediately Beijing responded, saying they will take "necessary countermeasures."
Have we been here before? We decided to look back at the history of tariffs in America.
Founding Fathers:
The use of tariffs date back to the founding of our nation. At the time, there was a strong resistance to any tax on the people. Afterall, they just fought a war over the premise of "no taxation without representation." Beyond that, it would have been incredibly difficult to collect these taxes, due to the lower technological abilities. Collecting tariffs on imports was not only easier, but also it would anger far less of the public.
In fact, the second bill signed in the young Republic was a Tariff.
President George Washington signed the "Tariff of 1789," which imposed a fixed tariff of five to 15 percent on almost all imports. One of the biggest advocates for tariffs was Alexander Hamilton. Centuries before his name became synonymous with Broadway stardom, it was his economic and political writings that made him famous. He wrote that tariffs were necessary to protect the "infant industries" of the United States. He feared that if the U.S. didn't protect it's industries, it would fall dependent on larger empires like Britain.
During the War of 1812, tariffs were boosted to 25 percent, in order to cope with the increasing costs of battle. The tariffs then kept rising, even in peacetime.
Tariff of 1828:
You've made it this far in an article about economic history! Good for you. You are dedicated to learning our history. This next chapter of events is sure to keep you interested. It not only crated a constitutional crisis, and provoked military intervention, but also it provided a preview for the next century.
The Tariff of 1828 coincided with the election of Andrew Jackson, a Democrat from Tennessee. This tariff set a massive tax of 38 percent on almost all imports. Immediately it caused a demographic split between the North and the South. Northern states were in support of the tariff because it protected their industries. But Southern states hated the tariff, because it would raise prices for goods, while they did not get the advantageous the North enjoyed. In fact, the South started referring to this tariff as the "Tariff of Abominations."
In South Carolina, the debate turned dangerous. The state leaders tried to nullify the law. Imagine that. A state simply trying to ignore a federal law. President Jackson was not a fan of tariffs, but still made the decision to enforce federal law. Jackson sent the Army to South Carolina, and fortunately a compromise was reached.
100 Years of Conflict:
The Tariff of 1828 perfectly epitomized the split that was growing between the North and the South. The agrarian South fought against tariffs, whereas the North would fight to protect them. And as the balance of power shifted, the policy on tariffs would follow suit, like a seesaw. In 1835, the Southern Democrats oversaw a tariff rate reduction. When the Northern Whigs (now defunct party) took Congress in 1842, they raised them back up. In 1857, the Democrats brought that rate back down.
This trend continued into the creation of the Republican Party, and the emergence of Abraham Lincoln. The future president, was quoted to as saying "give us a protective tariff and we will have the greatest nation on earth."
When the Civil War broke out, the tariff was raised, to finance the war effort. Even when the war was over, the tariffs stayed high to benefit the northern industrialists, who maintained control. Toward the end of the 19th century, the verbal battle broke out yet again, between strong voices. President Grover Cleveland was a big advocate against tariffs, whereas the likes of President William McKinley were out-spoken in their support for the tariffs.
The largest victory in this time-period for anti-tariff Democrats came with the Underwood Tariff, which passed in 1913. This drastically cut the tariff rate, creating a shift in focus towards income taxes, rather than tariff duties. This Democrat victory didn't last long. Soon, the Tariffs would be back.
Smoot-Hawley Tariff Act of 1930:
If you ask an economist, they'll tell you that the Smoot-Hawley Tariff Act is one of the most infamous tariffs ever passed. It came shortly after the start of the Great Depression, which officially began with the Stock Market Crash of 1929. This latest policy boosted tariffs to the astounding rate of 60 percent. The tariff was proposed by Sen. Reed Smoot and Rep. Willis C. Hawley, and raised tariffs on over 20,000 imported goods.
This tariff did not cause the Great Depression, but the consensus among economists is that it definitely made things worse. Many economists believe the tariff was passed, as a popular political action, rather than an economic one.
Change of Heart:
So, when did our country turn away from tariffs? This trend started shortly after World War II. The United States were the clear victor in the war, and had the strongest economy in the world. As a world leader, there was a clear advantage to free trade, so increasingly this became the policy domestically. And it wasn't just the United States.
Globally, there was a renewed effort to create international agreements, to create more free trade. In 1947, 23 nations came together to form the General Agreement on Tariffs and Trade. The first round of tariff reductions, lowered the rate to 35 percent. By the 1970's, this rate was in the single digits, where it has stayed for the last half-century.
In 1995, the global community created the World Trade Organization, which created new mechanisms to further enforce tariff reductions on a wider scale.
Take-Away:
Our source for this story was Ralph Sonenshine, an economics professor at the American University. So we asked him on his reflections, comparing our long history with the actions of today.
Sonenshine said that these tendencies to move toward tariffs have always been there. In our history, these factors have tended to be ideological or economic. These forces were at play with George Washington's signing of the Tariff of 1789, and they were there with the signing of the Smoot-Hawley Tariff Act of 1930.
Even in the modern era, intermittent tariffs on specific items have precedence. Sonenshine mentioned the 2002 tariff, which placed a 33 percent tax on imported steel. What's unique, according to Sonenshine, is that Trump has been using tariffs as a negotiating tactic, which he believes has "hurt the authority of the WTO significantly."
"If the U.S. is not going to abide by the rules," he said. "Some would say, why should other countries? In this case international law regarding trade becomes irrelevant and the function of the WTO ceases to exist."