Toying with Tariffs

As a kid growing up in the 1950s, the shadow of the Great Depression lurked over our home like a black cloud.  

My mom told stories of her mother yanking her out of high school and giving her a basket of bread to sell as she wandered the streets of St. Louis. The money she took in from the bread her mom had baked became a vital source of family income. Like many men at the time, my grandfather was laid off from working on the railroad.

For years, no one in our house dared mention Herbert Hoover, the Republican who had been the Depression-era president. My family revered Franklin Roosevelt, who steered a starving country from an economic catastrophe.

Breadline, F.D.R. Memorial, Washington, D.C., photo by Sonder Quest

And now we face another election in which the issue that caused or worsened the Great Depression — tariffs — is on the table. I know this subject is not as sexy as a Taylor Swift endorsement in this contentious and vital election. Yet these tariffs — which basically amount to sales taxes — can’t get enough news coverage. Tariffs are a crucial policy that could impact inflation just as significantly as the bout of rising prices now tapering off in America. Both candidates for the White House toy with tariffs. Voters need facts not fiction on an issue that could impact the pocketbooks of Republicans and Democrats alike.   

Tariffs have a rich history in America.

They’ve been part of the nation’s story since its earliest days, generating everything from job protection and economic slumps to trade wars. I’ll bet many of today’s voters don’t remember Senator Reed Smoot. The name seems like a character out of one of those Dr. Seuss books I read to my kids when they were young. He was a real person, though, elected by Republicans in Utah. He had a sidekick, Representative Willis Hawley, from the Oregon GOP, and together they created the Smoot-Hawley tariffs in the 1930s, which are a good object lesson for voters that will soon elect a new president.  

Smoot, Hawley, and their supporters, including President Hoover, pushed for tariffs in 1930 to protect American businesses from foreign competition, the same argument our current political leaders use to justify Trump tariffs. A compliant Congress passed the Smoot-Hawley legislation that slapped tariffs of about twenty percent on a wide range of goods, according to the Corporate Finance Institute. The result: International trade plunged by sixty-five percent as other nations reciprocated with tariffs against U.S. products, a classic trade war.

Whether the Smoot-Hawley law caused the Great Depression that haunted my home all those years later is a matter of conjecture. But the tariffs unquestionably made bad things worse in the 1930s. They were like doormats in the Hoovervilles of the era, makeshift shantytowns where Americans scrounged for food. Four years later, President Roosevelt signed a law that reduced tariffs in his drive to revive the American economy.

Now we have Donald Trump who calls himself “Tariff Man.” He proudly embraces the levies on foreign-made goods as a major plank in his economic policy, pledging once again to slap tariffs of twenty percent on a wide range of goods. The levies will generate income for the government and give Trump running room to cut taxes for wealthy Americans.  

Trump 2024 has experience with tariffs. During his presidency in 2018, he started a trade war by slapping tariffs on foreign products imported into America: Twenty-five percent on imported steel; ten percent on aluminum; about $370 billion on Chinese goods such as solar panels, and twenty percent on imported washing machines.

Although the tariffs target foreign companies and do protect American firms from unfair competition, the tax is actually paid to the government by the American firms that import foreign-made products. The American companies must then increase prices or absorb the cost of the tax through lower profits, something they rarely do. An analysis by University of Chicago economists and a Federal Reserve Governor focused on the impact of the twenty percent tariffs on washing machine makers. The study concluded they raised prices in America by about twelve percent, or around $86 for each unit sold. Economic analysts said the tariffs increased other prices, too, including those on goods only made in America. Domestic companies saw competitors who relied on foreign-made imports raise their prices and they did, too, stoking the kind of inflation that is a major issue in the current campaign.     

Trump’s 2018 tariffs, which were later kept in place and enhanced by President Joe Biden, were not the sole cause of the inflation that spread throughout the economy in recent years. Other factors contributed to rising prices. The tariffs reduced economic growth, though, causing about 142,000 job losses and adding $625 to the costs of the average American household, an analysis by the Tax Foundation, an independent think tank, says.

Trump was lucky. He inherited an economy from President Barack Obama that had enjoyed a record seventy-six consecutive months of job growth. Unemployment had fallen from the ten percent level at the end of President George W. Bush’s term to just under five percent. The strength of the growth helped the American economy minimize the impact of the higher tariffs. Although you wouldn’t know if judging from the campaign rhetoric, the American economy remains the envy of the world.  

In the current election, Trump advocates tariffs far more sweeping than those imposed by the Smoot-Hawley law or his earlier levies. His plan includes a sixty percent tariff on goods from China, and a twenty percent tariff on all other foreign-made goods imported into the U.S. He doesn’t stop there. He threatens a one-hundred percent tariff on products made in Mexico, and two-hundred percent tax on goods exported by American companies that move their factories abroad.

Vice President Kamala Harris has criticized Trump’s proposed tariffs. She opposes the broad, indiscriminate tariffs Trump advocates and argues they amount to a twenty percent sales tax on Americans. Although one can quibble with the numbers, it’s hard to say that tariffs don’t have the same impact as tax increases. Harris supports targeted tariffs, particularly on goods made in China, a country known for showering financial favors on companies that operate within its borders and sell their goods abroad.

Like Biden, she’s expected to continue Trump’s 2018 tariffs and the levies that President Biden later slapped on Chinese electric cars and solar panels. Let’s face it, tariffs bring in sorely needed tax revenue to a federal government that faces a projected budget deficit of $1.9 trillion in fiscal 2024.

The truth is tariffs have their use. If China or some other country showers their domestic companies with special benefits that are unfair to competitors, then a tariff is one way to level the playing field. They are not the only way to react, though, and tariffs stoke inflation. When you impose taxes on American firms and raise their costs of doing business, they usually raise prices or cut other costs, such as layoffs that reduce how much they spend on labor.

Tariffs also disrupt international trade, a subject that may sound esoteric to many voters but one that can have drastic consequences. Imposed on more than 20,000 imported goods, the Smoot-Hawley taxes sparked retaliatory tariffs against American companies. Exports and imports plunged by more than fifty percent, triggering a severe economic contraction and soaring unemployment. If nothing else, the law and its taxes exacerbated the Great Depression of the 1930s when unemployment soared to twenty-five percent, banks failed, and the nation’s economy shrunk by nearly thirty percent.

Even Americans who didn’t suffer through the economic downturn that traumatized my mom became children of the Great Depression, haunted by the litany of sorrow seared into the American psyche by the sad stories of the 1930s — tales that affected family lifestyle and economic decisions for decades. Just this week, Treasury Secretary Janet Yellen warned against imposing any tariffs, arguing they would hurt the American economy.

By the way, things didn’t end well for the tariff boosters, Senator Smoot and his sidekick. Smoot became one of twelve Republican senators that voters kicked out of office in the 1932 elections, just two years after he pushed his tariffs through Congress. They rejected Representative Hawley, too.

The philosopher George Santayana once said, “those who cannot learn from history are doomed to repeat it.” In the coming election, common sense suggests voters who favor indiscriminate tariffs are playing with fire.     

—James O’Shea

James O’Shea is a longtime Chicago author and journalist who now lives in North Carolina. He is the author of several books and is the former editor of the Los Angeles Times and managing editor of the Chicago Tribune. Follow Jim’s Five W’s Substack here.