This appeared a few days ago
Return of the tariff man: why trade protection wins hearts and minds in America
12:19 PM April 05, 2025.
As the tariffs announced on Donald Trump’s “Liberation Day” send world markets reeling, the future of the international trading system seems more uncertain than ever. But it is important to remember that the crisis has been brewing for some time.
Its distant origins were set in the late 1970s and 80s when a sharp and prolonged tightening of monetary policy in the US, aimed at curbing inflation, provoked a steep rise in the value of the US dollar.
Compounding that increase were changes in global capital markets – and most notably in savings-abundant Japan – that made it easier for foreigners who had US dollars to use their dollars to purchase American financial assets, increasing the dollar’s attractiveness and further boosting its value.
As the dollar rose to spectacular heights, the competitiveness of US exports plummeted, while what had been a reasonably steady flow of manufactured imports became a flood.
At the same time, an attempt by the US to initiate a new round of global trade talks failed miserably, not least because the world economy was beset by both “stagflation” and the beginnings of a debt crisis in developing countries.
Faced with that failure, American policymakers concluded that only drastic unilateral action could reduce the obstacles and distortions that had built up in the world trading system.
Meanwhile, as imports surged, the protectionist pressures in congress became overwhelming, with 600 trade bills introduced in 1984 alone. And judging by the widespread support Richard Gephardt, a Democrat from Missouri, secured when he proposed that an immediate 25 per cent tariff surcharge be slapped on countries that ran “excessive” trade surpluses with the US, voters were plainly clamouring for more.
The result was a proliferation of unilateral measures. After rising from 8 per cent in 1975 to 12 per cent in 1980, the share of US imports covered by trade restrictions jumped to 21 per cent in 1984. Those restrictions took the form of quotas, which helped hide just how punitive the measures were: had the same protective effect been secured by tariffs, the tariff rate on the products affected would have been in the order of 50 per cent.
But although it undoubtedly imposed high economic costs, the wave of import restrictions induced a beneficial policy response.
In particular, James Baker, who became Treasury secretary after Ronald Reagan’s re-election in 1984, convinced Reagan that it would be far better to seek a reduction in the value of the dollar – which was plainly overvalued – than to strangle trade flows.
Other countries (whose exports would suffer if the US dollar depreciated) resisted strongly, as they had when Richard Nixon had tried to achieve the same outcome in 1971, but Baker had a trump card.
“Our leverage with them,” he later wrote, “was that if we didn’t act first, the protectionists in congress would throw up trade barriers.” With manufacturers “pounding the desks at the White House, Treasury and congress, demanding that something be done to save them from foreign competition”, the threat was all too credible; so that by late summer 1985, “top foreign economic officials had begun to see that we were serious”.
And in September 1985 the world’s leading economies signed the Plaza Accord, which helped effect a gradual decline in the US dollar to more sustainable levels.
Nor did the consequences of the protectionist episode end there. Rather, the initial wave of American unilateral restrictions, and the possibility of worse to come, were a crucial factor in the launch and success of the Uruguay Round of global trade negotiations. During what was by far the most ambitious and far-reaching multilateral trade negotiations ever held, the risk of American unilateralism weighed heavily on the negotiating parties.
The round’s results were spectacular. Tariffs, which had averaged 40 per cent in the early 50s, came down to a developed world average of about 5 per cent. Even more important, progress was made, for the very first time, in reducing a broad range of non-tariff barriers, including to trade in services, which would boom in the years ahead.
The impacts of those outcomes on US policymakers were as far-reaching as the outcomes themselves. Clearly, they concluded, multilateral negotiations could work; but, equally, occasionally wielding a big stick was not entirely counter-productive.
It was against that backdrop that the North American Free Trade Agreement was negotiated. The proposal had originated in Canada with Conservative prime minister Brian Mulroney inviting Reagan to initiate the process in October 1985. In February 1991, under the auspices of Baker, who had become secretary of state in the administration of George HW Bush, Canada, the US and Mexico announced their intention to proceed with what became NAFTA.
At first Bill Clinton, who took office in January 1993, was somewhat ambivalent; but in a speech he gave shortly after coming to office he argued that while globalisation brought new challenges, “open and competitive commerce will enrich us as a nation”.
“In the face of all the pressures to do the opposite,” he concluded, “we must compete, not retreat.”
What Clinton didn’t realise was that the politics of US trade policy were undergoing dramatic change.
In effect, the reaction to NAFTA verged on hysteria – on both sides of American politics.
On the left, the manufacturing unions, which had long been protectionist, found new, quite unexpected, allies in the environmental movement and, even more surprisingly, received strong support from consumer advocates including Ralph Nader. Equally opposed were leading civil rights activists, with Jesse Jackson declaring “NAFTA is a shafta, shifting our jobs out of the country”.
Nor was the reaction on the right any more favourable. Along with conservative leader Pat Buchanan, a serious campaign against NAFTA was launched in the 1992 election by Ross Perot, who famously warned that if NAFTA was approved, “you are going to hear a giant sucking sound of jobs being pulled out of this country”.
That Perot secured 19 per cent of the popular vote – an extraordinary success for a third-party candidate – signalled the depth of the change then under way.
It did not take long for the effects to become apparent in congress. From the late 50s through to NAFTA, both Democrats and Republicans were broadly in favour of trade liberalisation. With NAFTA, Democrat support for legislation liberalising trade collapsed, never to durably recover.
As a result, the Republicans (who had historically been protectionists) were left as trade liberalisation’s only reliable congressional supporters, greatly increasing their political vulnerability.
The split played itself out over the opening to China. The Clinton administration’s decision to support China’s accession to the World Trade Organisation had been announced in the most inauspicious circumstances imaginable – the riot-plagued WTO meeting held in Seattle in November 1999.
At that meeting, Charlene Barshefsky, the US trade representative, told the assembled parties that subject to congressional approval, the US would extend “permanent normal trade relations” to China.
China filed a World Trade Organization complaint on Wednesday against U.S. President Donald Trump's new 10% tariff on Chinese imports and his cancellation of a duty-free exemption for low-value packages, arguing the actions are "protectionist" and…
In theory, securing approval should have been straightforward: the economy was strong and the unemployment rate had fallen to 4 per cent. In practice, getting it through was no easy task.
In the end, the legislation was approved by the House of Representatives in May 2000, but two-thirds of the house Democrats voted against it. It passed only because of the support it received from 164 Republicans – though the fact 57 Republicans voted against was a sure sign of what was to come.
To make things worse, shortly after that, global trade liberalisation ground to a complete halt. Under US pressure, a new round of multilateral negotiations was launched at Doha in November 2001. But there was no enthusiasm for the round in developing countries, which believed the benefits they had been promised from the Uruguay Round had not materialised, nor from the EU, which was reluctant to liberalise its agricultural markets.
Moreover, by that time the WTO had become an incredibly unwieldy organisation: as the number of “contracting parties” rose from 42 in 1961 to 76 in 1967 and then 160 in 2015, reaching the consensus needed for agreements became virtually impossible.
By late 2015, the round was plainly making no progress and so was mercifully ended. For the first time, a round had failed; without fundamental change in the rules, it was hard to believe that any round aimed at multilateral liberalisation could ever again succeed.
Taken together, those two factors – the change in US domestic politics and the collapse of the multilateral rounds – would have been enough to eventually trigger a turn in American trade policy to unilateralism. However, their effect was compounded by the impacts of China’s entry into the global trading system.
Donald Trump is set to announce new tariffs this week in the hope of spurring American industry.
That American consumers benefited enormously is beyond question; but it is also beyond question that the job losses in US manufacturing were very substantial. There has been considerable controversy about their precise extent; however, the conclusion reached by Massachusetts Institute of Technology economics professor David Autor and his co-authors that imports from China caused 21 per cent of the decline in US manufacturing employment over the period 1990-2007 seems plausible.
Nor did the wider geopolitical benefits that Clinton had pointed to as an important justification for the opening to China eventuate. That opening, Clinton had said in March 2000, “represents the most significant opportunity that we have had to create positive change in China since the 1970s, when President Nixon first went there, and later in the decade when President Carter normalised relations”.
“In the new century,” he went on to claim, “liberty will spread by cell phone and cable modem” – and as China reduced its barriers to trade, those would become ever more affordable. Yes, China would try to “crack down on the internet”. But “that’s sort of like trying to nail Jello to the wall”. As those attempts failed, and as the middle class flourished, the pressures for democratisation, along with those for moving to a fully market-based economy, would become increasingly irresistible.
That those predictions haven’t been borne out hardly needs to be said. On the contrary, the communist regime has both raised the surveillance state to new heights and reasserted its control over the economy, imposing myriad restrictions on international trade.
Seen in that perspective, the impetus behind the Trump tariffs is not difficult to understand. They were, moreover, one of his fundamental election commitments, constantly proclaimed and promised during the campaign. It is therefore hard to see them as anything other than a core part of his compact with American voters.
But it is by no means obvious that by taking the world trading system to the brink of disaster, those tariffs will, like the quotas the Carter and Reagan administrations imposed, provoke a reaction that ultimately strengthens global trade.
That was certainly not the case with the unilateral tariffs championed in 1890 by William McKinley, whom Trump absolutely reveres.
Hailed by his admirers as “the Napoleon of protection”, McKinley claimed that those tariffs, which more than doubled US rates of protection, were justified by being linked to reciprocity: if the target countries reduced their tariffs, so would the US.
In reality, the completely arbitrary nature of the tariff increases, the sheer harshness of the US demands and the intransigence of the American negotiators induced a worldwide move to greater protection, slashing global economic growth.
Even in Australia, where the direct impacts were insignificant, the ramifications proved material.
There was, to begin with, the economic effect, notably on wool exports, as British textile exports to the US declined into insignificance.
President Donald Trump often cites the 25th President, William McKinley, as an inspiration. The ‘McKinley Tariffs’ were some of the largest hikes in U.S. history, but in his second term, McKinley changed his mind, and argued for more free trade.
“There is probably no country in the world with anything to export that is not affected by the McKinley tariff,” Perth’s Western Mail reported in January 1891, “and Australia is no exception to the rule. Her chief staple, wool, is as severely treated as can be imagined.”
But no less important were the political consequences as America’s shift to high tariffs emboldened protectionism’s Australian advocates, who had no difficulty caricaturing the free traders as babes in the wolf-infested woods of realpolitik.
Those claims were echoed by protectionists worldwide; and helping the protectionist cause was the immense boost the McKinley tariff gave to global anti-Americanism. In Canada, for example, there had been, until then, strong backing for some form of free trade with the US. But, Canadian politician George T. Denison said, the tariff was “a heavy blow struck alike at our home industries and at the prosperity and independence of the Dominion of Canada – an unprovoked aggression, an attempt at conquest by fiscal war”. Its inevitable consequence, said Denison, would be to rekindle “love for Queen, flag and country”.
Denison’s prediction was not far off the mark. With “American perfidy” causing an uproar, John Macdonald, Canada’s Conservative prime minister, transformed the elections of 1891 into a referendum on Canadian-American relations, changing the Conservatives’ likely defeat into a narrow victory over the partisans of continental free trade.
Convinced that “the great contest that is now going on will determine whether Canada is to remain British or become part of the United States” and that “we are in great danger”, Macdonald ensured Canadian protectionism would more than mirror its American counterpart, damaging economic relations between the two countries for a century.
Ultimately, McKinley came to regret the tariffs he had imposed, which contributed to the American recession of 1893 and durably soured relations between the US and its trading partners. But by then it was far too late.
There are, for sure, some economists, closely associated with the “Make America Great Again” movement, who believe that, far from stoking inflation and triggering a decline in economic activity, the Trump tariffs will revitalise American manufacturing and help unleash a new age of prosperity. And it is indeed true that if the tariffs remain in place, the protected industries will grow, as some part of the demand that was previously served by imports switches to domestic production.
But in an economy that now has low overall levels of unemployment, the growth of employment in traditional manufacturing must come at the expense of other industries – and the victims are almost certain to include the high-technology activities at which America excels. That those activities have – as the EU’s recent Draghi report on competitiveness clearly shows – both propelled economic growth in the US and cemented America’s geopolitical pre-eminence should lead Americans to think twice.
All the other inefficiencies that have always bedevilled protection, ranging from rampant rent-seeking to reductions in competition, make the likelihood of a renewed, tariff-induced, golden age all the dimmer.
Conversely, if the tariffs are merely an instrument to force greater openness in global markets and encourage an agreement along the lines of the Plaza Accord, they could, in the end, leave America and the world better off.
But that won’t happen automatically. It is often said that you can’t make an omelette without breaking a few eggs. But as anyone who has ever made an omelette knows, breaking the eggs is the easy part; transforming them into something worth eating requires real skill.
So too is it with the trading system: disrupting it is easy; putting it back together, in better shape than it originally was, requires both a clear political will and skills of the very highest order.
A great deal therefore rides on whether the Trump administration goes down the path McKinley and his successors took in the 1890s, provoking a dangerous spiral, or the path of co-ordinated global reform that Baker pursued a century later. With so much at stake, one can only hope that wisdom, along with a healthy dose of common sense, will prevail.
Here is the link:
Useful to have some background on that is going on. I dread to think where we will be by the time this appears!
I fear things may have got a lot worse by the time you read this, after it was written on Sunday!
David.
