©2018 by The Economics Exchange. Proudly created with Wix.com

 
 
  • The Invisible Hand

21st Century Trump Protectionism compared to 1920s Protectionism

Updated: Feb 26, 2019

Could a similar urge towards economic isolation nearly 100 years ago teach us anything about the outcome of Trump's trade war?


Before 2008, protectionism seemed like an economic relic from a bygone age, yet since then, the US has adopted over 1000 protectionist measures, more than any other country and Trump has just escalated this much further. This post looks at a similar event in history to see whether this can give us a new perspective on current trade disputes. The Fordney-McCumber tariff of 1922 was passed by the then president Warren Harding and like Trump’s tariffs, it placed significant restrictions on exports from other countries which marks it out as one of the most significant protectionist measures of the 1920s.


First, what were the terms of both of the tariffs? Donald Trump’s trade war is still ongoing although there is currently a 90 day cease-fire. So far there have been three rounds of tariffs totalling $250bn with duties ranging from 10-25% and covering a range of industrial and consumer items. Meanwhile, the Fordney-McCumber tariffs employed a scientific tariff which said that no country could undercut US prices as well as a discretionary additional levy. They both seem pretty similar in their terms, yet the Fordney McCumber tariffs increased tariffs from 5% to 14% while Trump’s tariffs are due to increase average tariffs from 2%. Furthermore, the Fordney McCumber tariffs came after a cut in tariffs in the 1910s so they were still historical low while now in the US tariff rates have been below 5% for almost 70 years. Therefore, Trump’s move is far more shocking and breaks an economic policy consensus which never existed in 1922.


There is also a divergence in the motivations for the tariffs. Trump’s rhetoric makes it clear that Trump wants to protect manufacturing jobs and fight back against unfair trade practices in China. He accused them of using non-tariff barriers and abusing intellectual property rights- at a cost of $225- $600bn a year. The Fordney-McCumber tariff was also motivated by a desire to protect domestic industries but instead, the focus was on agriculture and not manufacturing. This was the main problematic industry in the 1920s because after WW2 exports to Europe plummeted and so did farmers’ income. These tariffs were largely born out of a ferocious lobbying drive by these farmers. Trump’s tariffs seem to be motivated by political factors and his tough line seems to be more targeted at improving his popularity with his core voters. The context is also vital to understanding the motivations for the tariffs. Strangely in the 1920s, the US had a $2.5bn trade surplus (a lot at the time) while the US now has a $500bn trade deficit. Therefore, tariffs would seem to be much more effective now which supports the point that Harding was motivated by the desire to protect a few industries and was influenced more by pressure from lobbyists. Trump’s stubbornness means he often does not concede to advice or listen to others.


The Fordney McCumber tariffs were born out of the 1920-21 recession while Trump seems to be responding to no immediate crisis and in fact, the US economy seems to be experiencing a temporary boom. This suggests Trump is more motivated by political factors while Republicans in 1921 were trying to come up with a solution to an economic crisis.


Both trade wars sparked hostile retaliation. However, in the 1920s it was Europe that responded while now it is China who are the main trade enemy of the US and who have inflicted the most painful retaliation. The Fordney-McCumber saw almost all major economic powers in Europe massively increase tariffs against the US, so by the 1920s the US was very isolated. France imposed levies of 45%-100% on cars. Meanwhile in 2018, Beijing responded to Trump’s provocation with $110bn of tariffs, significantly less than the USA’s attack because China lacks the same power over the quantity of imports they can tax. However, it has been a strategic retaliation with products like soybeans targeted which are major industries in Republican industries. Both trade wars, have not been one-sided and both belligerents have put up a strong fight. This is a powerful lesson that trade wars will only lead to retaliation and everybody will be worse off.


The impacts do differ quite significantly. Counter-intuitively for economists, the 1920s trade barriers actually heralded an unprecedented period of prosperity for the US known as the ‘roaring twenties’. Notably, the purchasing power of farmers rose. GDP growth was 7% between 1922 and 1927. However, the same farmers that were trying to be protected also suffered from rising costs of farming equipment and a small export market to sell surplus stock. It is thought farmers lost more than $300m annually as a result of this legislation. Although the full effects are yet to be seen in the US, a few dangerous warning signs are appearing. The car industry is the worst affected as they face higher metal prices consequently Ford and General Motors have lowered profit forecasts for 2018 along with other companies such as Coca-Cola. Lower profits inevitably means cutbacks, ie lower employment. On a wider scale, the IMF estimates world GDP growth could be 0.5% lower by 2020. Although one of the policies seems to have brought prosperity it is clear both cases are good examples of the failings of tariffs. In the end, all tariffs fail because they increase costs for producers and consumers and retaliation is inevitable.


In both cases, opposition has been ferocious. The 1920s tariffs were supported by Republicans but strongly condemned by Democrats and progressives. Business owners such as Henry Ford who wanted to expand abroad protested. Even some farmers opposed the tariff and blamed it for the agriculture depression because they needed foreign markets to sell their surplus. Once the original supporters of a policy start turning on it, it is clear it has failed (a good lesson for monetarists). In 2018, the response from the Democrats has been more muted with Nancy Pelosi and Chuck Schumer both supporting a harder stance towards intellectual property breaches. However, economists have been exasperated. Reuters estimates 60-80% of economists believe tariffs on steel and aluminium would do net harm to the US economy. Paul Krugman has called it a ‘big, bad deal’.


Overall, it seems despite a nearly one hundred year difference, the problems of tariffs remain and policies to protect industries will just lead to their fall in the long-term.




Thank you for reading. Please subscribe at the top of this page for updates on new posts and to support this blog.