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Takeaways
- President Donald Trump's "reciprocal" tariffs push the effective U.S. tariff rate to its highest since 1909.
- The tariffs are a reversal of the post-WWII global trade system which economists credit for raising U.S. standard of living.
- Many experts predict that the policy would increase inflation and slow economic growth.
Donald Trump has dreamed for years of turning back the clock on the economy. This week he achieved that goal by announcing a new trade policy that will raise the effective tariff to its highest rate since 1909.
In his speech Wednesday announcing wide-ranging and varying tariffs, Trump said he wanted to return the U.S. economy to how it was in the 1870s and through the turn of the century before the creation of the income tax in 1913. During this time, the government ran on tariff revenue.
The tariffs are a dramatic reversal of decades of U.S. Trade Policy. Since World War II, presidents— including Trump in his first term—generally sought to expand free trade, pursuing agreements to open foreign markets to U.S. exporters and mostly keeping tariffs against foreign goods low.
"We have a 20th-century president in a 21st-century economy who wants to take us back to the 19th century," Douglas Irwin, a trade economist at Dartmouth, posted on X.
In recent times, Trump and former president Joe Biden have imposed a small number of tariffs that were targeted at specific industries. Many economists attribute the rise in living standards in the U.S. as well as abroad to the expansion of free-trade. Some have pointed out the downsides of free trade, such as the loss in manufacturing jobs in the U.S.
Economists criticized the new tariffs, with many struggling to understand what they were supposed to accomplish. Many forecasters said that the tariffs would increase the cost-of-living while dragging the economic growth down, possibly leading into a recession. Meanwhile, the markets are in chaos.
How Smoot Hawley Tariffs Smothered Economy
Some policy analysts have drawn parallels with the protectionist nature Trump’s policies to the Smoot-Hawley Tariff Act from 1930.
Like Trump, the senators that sponsored the act hoped to encourage the production of and the purchase of U.S.-made goods. To do this, they raised tariffs that were already high by about 20%, despite the vehement protests of economists.
The tariff increase sparked a global war of trade in which 25 countries retaliated to the U.S.’s action, and global trade fell by 66% over a period of five years. Economists say the trade war exacerbated the severity of Great Depression.
This week, China became the first country to announce retaliatory trade tariffs against U.S. goods. Other countries have also threatened to respond. Tariffs could be lower than announced if negotiations continue.
If the U.S. follows through with tariffs as planned and countries engage in a tit for tat trade battle, economists expect a greater chance of a depression.
