Tariffs in America: A Look Back at Their Impact on the Economy

Eric Udvari, CFP®, CPWA®, AAMS®, Wealth Manager

Over the last couple of months, the markets and investors have been concerned about numerous policy decisions that a Trump administration would impose. One of these concerns that continues to be front and center are tariffs. What exactly are tariffs? Simply put, these are taxes imposed by one country on the goods or services imported from another. Tariffs can be used to influence another country, raise money or to protect a competitive advantage.

Shipping containers on a ship against a gray sky

Tariffs are not a new, radical idea when comes to American history. In fact, the second bill President George Washington ever signed was the Tariff of 1789. This bill allowed the U.S. government to impose a 5% blanket tariff on all goods imported to the United States as a form of tax on U.S. citizens. We did not have federal income taxes at the time.  

Many intellectuals during the first years of our country were in favor of tariffs. They believed that we should create our own manufacturing industries and use tariffs to protect these industries. Alexander Hamilton was the leader of this thought movement at the time. In fact, from 1792 all the way to the end of WWII the United States had some the highest tariffs in the world. 

1792-1812 Average Tariff: 12.5% 
1812-1816 Average Tariff: 25% 
1816-1820 Average Tariff: 35% 
1820- 1945 Average Tariff: 40% 

Up until the end of WWII the United States had some the highest tariff rates in the entire world. Some history buffs out there will notice that 1812 was a line in the sand that marked a dramatic increase in these tariffs. This was the War of 1812 with Great Britain. We imposed these tariffs to deter U.S. citizens from buying foreign products, specifically goods from our adversary at the time, Great Britain. We continue to maintain and elevate these tariffs to protect our manufacturing which was then mostly wool, cotton and iron.  

The American Civil War had a multitude of factors that spurred the internal fighting. One of these factors included tariffs. Abraham Lincoln was a major supporter of tariffs and was quoted as saying: “Give us a protective tariff, and we shall have the greatest nation on earth.” He levied a 44% tariff during the Civil War to protect American businesses, build the railroad and fund the war. These high tariffs remained until the end of WWII.  

It is interesting to note that during the height of some of the highest tariffs the U.S. ever imposed (1871-1913) the U.S. economy grew annually at 4.3%, well above trends we have witnessed in the 20th century. During this period tariff rates never fell below 38%.  

The sentiment on tariffs began to shift in the early 1900’s as different political movements pushed for free trade. In 1913, tariffs were drastically reduced, and the Sixteenth Amendment (The Federal Reserve Act) was implemented. This created the Federal Reserve and income taxes on citizens, making tariffs less necessary to raise revenue for the government. By 1921, tariffs were implemented once again, and the Smoot-Hawley Tarriff Act of 1930 was implemented right at the time of the Great Depression. This time the tariff backfired, and American imports and exports cratered, worsening the Great Depression. By the mid 1930’s tariffs faded, and low tariff rates dominated global trade.  

Between 1948 and 1994 members of the General Agreement on Tariffs and Trade (GATT) would meet and negotiate mutually agreeable tariff rates relating to global trade. This group would later form the World Trade Organization (1994), which would help to create uniform tariff rates.  

For a time, American producers flourished post 1948 but the 1970’s marked the decline of US industry. Global competition from low-cost producers was too much to overcome and low import tariff rates offered no protection. Globalization of trade continues to dominate today’s economy.  

You can see from the top two charts above we are a net importer of goods and a net exporter of services. We import clothes, electronics, cars, and industrial material. We export things like software services, financial services, and telecommunications. Add them together and we are still running a large trade deficit. 

This article is not meant to sway your opinion on tariffs but to provide context around the United States’ long history with tariffs.  

What we are dealing with today under the Trump Administration is a measurable policy shift when we look at the last 70 years of global trade policy. Tariffs have tracked well under 10% for the last 50 years. We have witnessed the current administration float 25% tariffs on certain countries in the first couple weeks. Historically, these 25% tariffs are much more in line with how we viewed global trade prior to the end of WWII.  There is a lot of information that we do not know yet regarding how widespread tariffs could be under the Trump administration. Howe and Rusling will continue to monitor data, and we will make the appropriate changes necessary.

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Eric Udvari

Eric is a Wealth Manager who leads our Boise, Idaho branch.
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