TARIFF WARS: Where Are We? Will History Repeat?


President Trump is standing firm in a tariff battle with China, having imposed tariffs on imports of steel and aluminum from most countries in the world. Further, he is threatening to pull out of an existing trade agreement with Canada and Mexico unless it is significantly modified. Meanwhile, in a positive development just last week, the U.S. and the European Union have agreed to a trade-war ceasefire. The situation evokes comparisons with the last global conflagration over trade during the Great Depression when President Herbert Hoover signed the Tariff Act of 1930 (also known as the Smoot-Hawley Act) which raised already high tariffs on hundreds of imports.  Other counties retaliated, paving the way for worldwide protectionism which worsened the Depression and took decades to reverse. The concern for investors is, therefore, “is history repeating itself?”

President Hoover, a Republican, took office after winning the election in 1928 with a promise to raise tariffs despite opposition from more than 1,000 economists and papers.  With the stock market crash in October of 1929, 20 percent tariffs were effectively increased to 40 percent as fixed dollar amount tariffs were assigned by volume or weight rather than as a percentage of price. As prices collapsed due to the subsequent Great Depression, the effective tax rates rose further. As expected, U.S. imports and exports plunged by 40 percent as trading partners retaliated with their own tariffs. Unfortunately, the American farmers and manufacturers who were supposed to be the main beneficiaries from the Smoot-Hawley Act, saw their crop prices and businesses collapse.

Today, Trump’s tariffs differ greatly. Tariffs on steel, aluminum, washing machines and solar panels from all over the world combined with $34 billion worth of China products only amounts to about 5% of U.S. imports. In 1930, about a third of imports were subject to duties, and those were at a much higher rate than today’s proposals. However, should Trump impose tariffs on virtually all Chinese shipments to the U.S. as he has threatened to do, that would bring the proportion of imports covered to about 25 percent.

Should we expect another depression? Probably not, the widespread retaliation that occurred in the 1930’s contributed significantly to the global collapse of trade and as tends to be the case, policy makers around the globe shouldn’t be expected to make the same mistakes again.  Today, there are significant differences at the Fed as well. Instead of keeping rates high and using tight monetary policy to defend the dollar, actions over the last few decades have proven that there are very low odds policy makers would repeat those mistakes again in the midst of any type of a slow-down, let alone an economic collapse. We will have to be alert to an increase in inflation should the tariffs be ratcheted up though as the market has been sensitive in 2018 to the fear of higher rates choking off the 10 year recovery.

The information provided is for illustration purposes only. It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action to be taken. These analyses have been produced using data provided by third parties and/or public sources. While the information is believed to be reliable, its accuracy cannot be guaranteed.