How US trade wars have always backfired

With US President Donald Trump's announcement of so-called reciprocal tariffs – including a 10% universal one – questions are being raised about what the move could possibly achieve.

Is Trump bumbling through another mistake as he is often prone to or has he actually taken a successful page out of America's imperialist playbook?

Historically, tariff wars have yielded mixed results.

While there can be some sort of short-term success, the consequences can plague related actors for quite a long time.

The first

In the 1930s, the US, like the rest of the world, was reeling from the Great Depression.

Then US president Herbert Hoover – a self-made millionaire – however, promised to usher in a new era.

His belief was that the Great Depression was caused solely by worldwide problems. But through "rugged individualism", this, too, could be overcome.

Even at the height of the Depression, Hoover claimed that "prosperity was just around the corner".

Of the numerous actions he took for a sort of course correction, the one that stood out was the 1930 Hawley-Smoot Tariff Act.

The Act was meant to add more taxes to foreign goods to make US goods appear cheaper and encourage the American people to buy them. The intention was to help to put money back into the economy.

At first, the act wouldn't pass, but the 1929 stock market crash led American lawmakers to believe their industries needed insulating from foreign imports.

The Act wasn't passed only to make US goods appear cheaper.

After World War I, European agriculture recovered, leading to a surplus of farm goods worldwide. This caused crop prices to plummet, hurting American farmers. The bill was initially designed to raise tariffs on agricultural imports to protect US farmers from cheap foreign competition.

At the same time, another factor – which seems to have resurfaced – was a growing chorus ushering in the rise of economic nationalism.

Many American businesses and labor unions pushed for higher tariffs, believing it would save jobs and stabilise the economy.

Ultimately, however, the tariff plan backfired.

Instead of boosting the US economy, the tariff triggered global retaliation, as other countries imposed their own tariffs against American goods.

Grievances developed almost immediately.

The tariff increases in Smoot-Hawley strained the economies of countries already suffering from the Great Depression and the costs of rebuilding after World War I.

Soon, 25 countries retaliated by increasing their own tariffs.

It has been reported that US exports plummeted by over 60%, worsening the Great Depression.

The trade war led to further economic contraction, increased unemployment, and deeper financial instability.

As a result, Herbert Hoover's presidency is largely viewed in a negative light due to his handling of the Great Depression.

Hoover was increasingly mocked and blamed for the continued hardships.

He became very unpopular.

On the edges of many American cities, homeless people lived in shacks made from cardboard and any other waste material they could find.

These shanty towns and shacks became known as 'Hoovervilles'. Newspapers used as blankets were called 'Hoover blankets'.

He then lost the 1932 election in a landslide to Franklin D Roosevelt.

After taking office, President Roosevelt began working to reduce the tariffs.

It is also when Congress passed the Reciprocal Trade Agreements Act, ending the era of US protectionism, firmly in place since the American Civil War.

That law transferred the authority for tariff policy to the White House, authorising the president to negotiate with foreign heads of state for lower tariffs at both ends.

While economists disagree how much the Smoot-Hawley Act worsened the Great Depression, no one seems to think it was a good idea.

The automobile wars

Back in the 1980s, America once again felt stung by bilateral trade deficits.

At the time, leading the US was yet another celebrity turned president – Ronald Reagan. 

To turn the tide, or at least hope to do so, the Reagan administration turned to protectionism. This was done in a way not seen since Herbert Hoover some 50 years earlier.

For Reagan, a free-market proponent, perhaps the consequences mattered and not the optics. 

During that period, growing American concerns about trade were largely directed at Japan, which was steadily outcompeting US firms in various industries, often being accused of engaging in "unfair trade practices."

In response, the Reagan Administration and subsequent governments sought to address the trade imbalance by leveraging diplomatic pressure.

They implemented tariffs and quotas targeting key Japanese exports, such as automobiles and motorcycles, in an effort to curb the widening trade deficit.

At the time, the US automobile industry was mainly dominated by Japanese automakers – Toyota, Honda and Nissan, among others.

Meanwhile, American automakers (GM, Ford, Chrysler) were struggling, losing market share and facing layoffs. The US auto industry and labor unions pressured the government to take action against what they saw as unfair competition.

One difference between Reagan and Hoover, however, was that the former did not resort to tariffs.

Instead, Reagan used diplomatic pressure to negotiate a Voluntary Export Restraint (VER) agreement with Japan in 1981.

Under the agreement, Japan agreed to limit car exports to the US. This avoided an outright trade war, while still helping US automakers.
Reagan hoped this would give American car companies time to become more competitive.

In the short-run, this helped American carmakers.

But it is prudent to note what made Japanese cars so preferred to begin with: they were cheaper, more fuel efficient (a vital point after the 1973 oil crisis) and more reliable than their American-made counterparts.

So in the long run, with their main selling points still intact, the Japanese carmakers adapted.

Instead of just accepting the limits, they built factories in the US.

Furthermore, they turned to exporting luxury models (Acura, Lexus, Infiniti), increasing their profits.

With fewer imports, car prices rose, making both American and Japanese cars more expensive.

The Big Three in American automobiles (Ford, GM and Chrysler), on the other hand, also failed to make enough innovations. In comparison, their cars were still considered lower quality.

The policy also indirectly helped Japanese automakers by pushing them to invest in the US, making them stronger competitors in the long run.

In the end, the real winners were Japanese companies.

By the 1990s, Japanese brands were more competitive than ever, while American automakers continued to struggle with quality and innovation.

Trump vs China

In 2018, then-President Donald Trump launched a trade war with China.

His arguments were parroting his predecessors – China had engaged in unfair trading practices, its trade deficit with the US was too large and tariffs would bring manufacturing jobs back to America.

Trump's administration placed up to 25% tariffs on over $360 billion worth of Chinese imports, targeting key industries such as electronics (smartphones, computers), industrial goods and agricultural goods.
In response, China hit back with its own tariffs, particularly on US farm products like soybeans and pork, hurting American farmers.

China's retaliatory tariffs devastated American farmers, especially in soybean-producing states. The US government had to bail out farmers with $28 billion in subsidies, essentially making taxpayers foot the bill.

The trade deficit, however, remained high, while the tariffs were borne by importers, instead of China. It also meant higher prices for consumers, while US manufacturers, reliant on Chinese materials for production, also suffered.

China also found new markets for its products and agriculture.

More importantly, instead of bringing jobs back to the US, Trump's war pushed companies to relocate to other countries while damaging key American industries like farming and manufacturing.

On a high note, however, the tariff did prod China into signing the "Phase One" trade deal, where it agreed to buy an additional $200 billion worth of US goods.

As also seen during Reagan's time, it also pushed companies to invest more in US manufacturing to avoid tariffs.