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Professor Emeritus Keith Maskus.��

Early in its history the United States was an agricultural economy and there was not much industry. With industrialization in the late 19th century, tariffs were still important for protection and raising government revenue, but were coming down because it was significant for industrialists to have access to international components and labor. In 1913, the United States replaced tariffs and some other forms of revenue with the income tax and almost immediately, tariffs became unimportant as a matter of revenue generation.

Tariffs came back with the Smoot-Hawley Tariff Act of 1930, when the U.S., concerned about an oncoming reduction in employment and what seemed to be a recession at the time, raised the average tariff rate on affected imports to well over 50%. All of the other major countries in the world retaliated very quickly at that time, and global trade from 1930 to 1932 was cut by 70%, both due to the tariff increases and to declining incomes. That tariff war was a real contributing factor to the Great Depression.

From the 1950s through the 1990s, there was a generalized reduction in global tariff rates imposed on manufactured goods and consumer goods. The United States has been a very open economy in this context. So have Europe, Canada and other similar countries. And that opening was pretty much led by the United States, and later, the United States and Europe together. President Trump is fond of saying that the world is screwing the United States through its trade policy. But in fact, the history here is that the Americans led this process toward pretty free global trade, and we benefited as much as anyone else from it, through access to lower prices and international technologies and investment.

How is that different from what we’re seeing in headlines now?

The trade war initiated by the Smoot-Hawley Tariff Act in 1930 was massive, but it did not have this kind of strange variability from day to day—the varying tariff rates and threats to use tariffs for things they don’t really work for. At that time, countries raised their tariffs and kept them at those high levels for a good seven, eight years.

Now, trade wars of this kind are exceptionally uncommon, and the only one of any consequence after World War II was between the first Trump administration and China. You may recall that we put in these high tariffs on steel and aluminum from many countries, including China, and they responded. Then we put higher tariffs on a lot of their imports. They responded, and so on.

The current Trump administration, as far as I can tell, has not articulated exactly what they're trying to achieve with all of this variability and these threats. It generates considerable economic uncertainty, and of course, also generates a feeling, on behalf of our trading partners, that the United States is becoming untrustworthy and can't really be depended on to lead the global economy the way we've been doing for generations.

What are some examples of ”using tariffs for things they don’t really work for?“

President Donald Trump with Canadian Prime Minister Justin Trudeau in 2019. (Credit: Wikimedia Commons/State Department Photo)

Tariffs are primarily used to protect domestic industry from import competition. That was easier in the 19th and middle of the 20th century—now international supply chains are much more complicated, making tariffs a significant element of costs of production around the world.

Tariffs can also be used to raise revenue. But they’re really only used that way in developing countries. In the U.S., Canada, Europe and other rich countries, that strategy has long since been replaced by more efficient and broader tax systems, such as the income tax here or the value added tax elsewhere.

More recently, we're seeing tariffs used as components of sanctions packages. So as you know, we have very extensive economic sanctions against Iran and North Korea, Russia, and several other countries, including China. The sanctions exist in principle to try to change behavior that we don't like. Sanctions do economic damage to those countries, but they don't change the government's behavior very much.

In this new environment, we see one person deciding tariffs are appropriate tools to use to achieve or influence almost anything, like pressuring Canada and Mexico to up their immigration enforcement and stop the flow of fentanyl into the United States.��

Let’s use fentanyl as a detailed example:

If you really want to deal with the fentanyl problem in the United States, it's really an American problem. We have this excessive demand for illicit drugs. And if you want to deal with that, you need to come up with interventions that try to work at the source. Even if tariffs did stop the flow of drugs across our borders with Mexico and Canada, you still have demand. So, you will get more black market products and higher priced drugs. You get it coming from elsewhere, or produced more in the United States. That's not the way to go about trying to deal with a fentanyl problem. It is a way to throw around your weight as a big country without achieving the underlying objective.

What I’m trying to say in this long answer is this—if you have five problems you want to address, using one tool, tariffs, will never get you there. Tariffs are indirect and a very rough, blunt instrument that doesn't generally get you what you want, and we'll find that out.

What is the impact on the regular consumer?

Is there anything people can do to prepare for economic changes or challenges caused by tariffs?