This appeared a few days ago
Return of the tariff man: why trade protection wins
hearts and minds in America
Henry Ergas
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:
https://www.theaustralian.com.au/inquirer/return-of-tariff-man-past-mistakes-should-make-us-think-twice-about-likelihood-of-renewed-golden-age/news-story/28333b5b27604cec8ff198824a10e030
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.
