Recent rhetoric from President Donald Trump over tariffs and a possible trade war with China has the market worried. This is not the first time tariffs have been used in trade wars.
The Tariff Act of 1789 was the second piece of legislation crafted by the founding fathers. Tariffs were the United States’ greatest source of revenue in the country’s early days, and they have remained relevant today.
Tariffs are a tax on imported goods instituted by a nations government. Countries use them to protect nascent industries, help spur internal job growth or for national defense. To understand the current brouhaha between the United States and China over tariffs, it is important to understand the history behind it.
Tariffs and the mercantilist ideology of protectionism grew in stature thanks to the British Empire. Its profound use of protectionism, through the Navigation Acts, allowed its colonies to only trade with the mother country of Britain. These acts protected and shielded all of Britain’s colonial industries from outside competitors, such as Spain or France.
The United States’ main thrust toward revolution had much to do with the protectionist policies like that of the Tea Act, which forced the colonists to buy tea only imported from Britain. Ironically, after obtaining independence, the fledgling United States turned around and protected its own textile and iron industries from foreign competition.
This was not without debate, as the new tariffs heavily favored the northern states and their factory-oriented industries while the southern states and their farmers were negatively affected. Other countries retaliated against the U.S. tariffs by imposing duties of their own on U.S. produce such as rice, cotton and tobacco. After the Civil War, the north gained the political advantage and would go on to pass thousands of tariffs over the next 60 years, leading up to the Great Depression.
Hindsight is always 20/20, but many historians believe this policy of economic protectionism coupled with international isolationism contributed greatly to World War II. Germany, economically unstable from World War I, was devastated further by the Depression. Adolf Hitler used the economic malaise as a rallying tool to garner support for a renewed Germany under his leadership.
After the conclusion of World War II, the United States and its allies committed themselves to never letting protectionism and isolationism lead to another war of such caliber.
The Bretton Woods Agreement, developed at the United Nations Monetary and Financial Conference in 1944, laid the groundwork for the system of international trade upheld through international institutions.
Free trade has become the language of economics between most countries. A system designed around the economic theory of comparative advantage, should, in theory, allow both countries trading with each other to prosper.
In practice, it does not always work out so smoothly. For example, in China there is no federally mandated minimum wage or working standards that allow Chinese goods to be produced much cheaper in comparison with their U.S. counterparts. As a result, when these countries continued to trade, it led to a deficit that Trump has pointedly acknowledged, saying the United States is not “winning.”
What free trade also does, however, is bind countries’ economies together. It creates a mutually assured economic destruction, similar to that of its nuclear counterpart, that should, in theory, keep countries so economically intertwined that they have to refrain from going to war with one another.
That being said, Trump’s newly imposed tariffs on China in the name of national security are not a new strategy. They are an economic tool that has existed for hundreds of years and has been used in the United States since the birth of the nation. How its use will play out in this a potential trade war has yet to be determined.
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