Of Tariffs, Trump and History
Protectionism is not new as a political placebo. It has long been used to pacify constituencies torn apart by technological change. In its most benign form, it is like a Roman circus of old, distracting the population -- a cheap political trick that when performed appears to have no cost to the constituency. A concept first labeled by Adam Smith and then used by John Maynard Keynes called “beggar thy neighbor” essentially involves taking a political action that might economically protect your constituency but makes your neighbor poorer. It measures the moment when the political rhetoric of protectionism forces shortsighted political action, passing the cost on to others with no thought of how that cost can ricochet with devastating impact.
Yet Donald Trump, with his total lack of any understanding of American or world economic history, has doubled down on this concept to appease his base.
There is little doubt that technological change has created severe anxiety in the American workplace. Its impact on the steel industry has served as the red herring for Trump’s tariff actions. In the late 1970s, it took 10 workers to make a ton of steel. Today it only takes one.
The automobile industry is another sector that Trump uses as a prop for his politically motivated trade war. In 2017, the United States manufactured more than 11.2 million vehicles, about double the quantity of the early 1950s, when there were no imports. Yet those 2017 production numbers were achieved with almost the same number of workers as in 1953, approximately 950,000.
The history that President Trump never learned shows that the U.S. automobile industry in its early years also whipped up a technological tsunami of change. Like today, these changes set off political shock waves, forcing Washington to look for a culprit from outside. Washington then engaged in a tariffs game that inevitably resulted in disaster.
In the early-to-mid-1920s, the growing of horse feed in the United States, a major part of the American farm economy, was battered by the switch from horse-drawn vehicles to automobiles. It is estimated that one-sixth to one-quarter of all farmland cultivated in the United States before the automobile was dedicated to growing horse feed. With the advent of the automobile, that land was no longer needed for animal feed, and farmers all across the United States planted crops for human consumption on what previously had been oat fields. This naturally caused a severe oversupply of food crops. Prices fell and farm income was drastically reduced, making it difficult for farmers to pay the taxes and bank financing owed on their land. By the late 1920s, approximately 18 percent of American farms were in foreclosure.
The farmers at that time and their representatives in government -- in a manner not too dissimilar to advocates of protecting coal or steel today -- pushed for increased tariffs on agricultural imports. Looking at the actual numbers, there was no logical reason to increase agricultural tariffs. Most American farmers faced little competition from agricultural imports. In fact, the opposite was true: Exports accounted for 15 to 17 percent of farm income in 1926-1929.
Logical or not, protection against change is the easiest of political sales pitches. It is pure economic populism: The outsider is destroying our economy and must be prevented from doing so.
In his campaign for re-election in 1928, President Herbert Hoover promised to help farmers by increasing tariffs on agriculture imports. After his successful re-election, Hoover turned to Congress.
Politics being politics, once the bill to raise tariffs on agricultural products was introduced to Congress -- the bill would be known as the Smoot Hawley Tariff Act -- the horse-trading began. Naturally the senators and representatives from non-farm states traded their support for agricultural tariffs by demanding support for higher tariffs on manufactured products. By the time the Smoot Hawley Act was finalized in Congress and sent to Hoover for his signature, it imposed an effective tax rate of 60 percent on more than 3,200 products and materials imported into the United States, quadrupling previous tariff rates on individual items.
Smoot Hawley’s disastrous impact on the United States and the world was immediate. The press in Belgium, Italy, France, Germany, Spain, Sweden, and Switzerland instantly went on the attack. In France, Smoot Hawley was compared to a declaration of war, an economic blockade. In Sweden, the popular press labeled it "the most terrible blow against the economic life of the world," while a newspaper in England compared it to the German attack of 1914.
Politically, there was nothing these countries could do to appease their own constituents’ anger but to adopt their own beggar-thy-neighbor tactics and raise tariffs against U.S. products, in particular against the U.S. auto industry. American autos were an easy target for retaliation, since before Smoot Hawley, American cars made up 54 percent of global trade in motor vehicles.
In the category of “be careful what you wish for,” American farm exports after the passage of Smoot Hawley dropped by a third of their 1929 level by 1933. Retaliation against U.S. cotton as an example was immediate. Three days after the bill became effective, Great Britain prohibited the importation of certain grades of raw apples from the United States, and Argentina imposed restrictions on the importation of American eggs. The severe decline in U.S. agricultural exports made a troubled farm economy much worse.
Economists differ over whether the Smoot Hawley Tariff Act of 1930 was one of the main drivers of the Great Depression, or merely an accessory to the crime. But one thing is clear: Technology plus automation equals tariffs is a political formula that always leads to economic disaster.
Edward Goldberg is a professor of international political economy at New York University’s Center for Global Affairs and author of “The Joint Ventured Nation: Why America Needs A New Foreign Policy.” His next book is “Why Globalization Works for America: How Nationalist Trade Policies Will Lead to Ruin” Follow him on Twitter @EdwardGoldberg. The views expressed are the author's own.