US Tariff Policy Over the Years

The Constitution unambiguously gives Congress, not the President, authority over domestic and foreign commerce and taxes. Tariffs are taxes on commerce that crosses borders. In fact, until 1934 Congress completely dominated tariff policy, just as the Founders wanted. Almost every year from the end of the Civil War to 1934, Congress voted on new tariffs and the President played little to no role in this process. These higher tariffs were both placed on individual products and sometimes across the board. It was observed that during this period Congress was almost incapable of lowering tariffs. In other words, higher tariffs were the rule; lower tariffs were the exception to the rule. The dominant trade policy narrative or explanation that all believed focused on import politics and the negative effects of foreign competition. In other words, members of Congress used higher tariffs to protect specific American companies in their districts from foreign competition. Yet, the Smoot Hawley Tariff of 1930 was the last major across the board increase in tariffs by the Congress in US history until the arrival of Donald Trump. So, what happened?

The Great Depression changed not only the trade policy narrative, but also which branch of government dominated tariff policy. Congress passed the Smoot Hawley Tariff with the traditional narrative of protecting American companies and jobs from foreign competition. Subsequent across the board tariff retaliations by other countries created a global trade war. This was one of the major mechanisms, another being retaliatory currency devaluations, that caused the depression in the United States to become global.

The lesson learned by the Roosevelt administration and those that followed was that higher tariffs were simply bad economic policy. Tariffs invite retaliation, which lead to further retaliations, and trade comes to a standstill, which leads to recession/depression. Everyone loses. Roosevelt believed that future wealth and job creation in the US and the world were dependent upon the reduction of tariffs globally. The political narrative of trade policy now focused on export politics and the benefits of lower tariffs. Lower tariffs or freer trade opens markets abroad and creates more exports and jobs at home. Lower tariffs became the rule, while higher tariffs are the exceptions to the rule.

Members of Congress agreed but politically it was impossible for the majority of them to vote to reduce tariffs for fear that it would lead to greater economic competition for many factories and companies in their districts. Those companies and their workers threatened by foreign competition would simply vote against the representative if he/she voted to allow foreign competition by lowering tariffs. There was an agreement that lowering tariffs was the best policy but the tariff policy making process had to change to allow the executive branch, not the Congress, to take the lead in negotiating reciprocal tariff reductions with other countries. Only the executive branch could change the trade policy narrative.

The Congress passed the Reciprocal Trade Act of 1934. The executive branch, representing the entire country rather than small districts or particular states, was given the authority to negotiate reciprocal tariff reductions directly with other countries. If the reductions were 50% or less than the Smoot Hawley tariff, these reductions did not require Congressional approval. If the reductions were more than 50% then the executive branch was required to submit them to Congress while only requiring a majority vote in both the House and the Senate to approve the tariff reductions. Negating the tariff reductions or increasing tariffs required a two-thirds vote of both the House and the Senate. The executive branch was granted even more authority and discretion over tariff policies. In particular, I refer to the 1962 Trade Expansion Act (especially section 232) and the 1974 Trade Act (especially sections 122 and 301), although these acts still require consultation with, have significant limitarions, and subsequent approval by the Congress.

Thus, the President or executive branch came to dominate tariff policy. Lower tariffs became the rule with higher tariffs being the exception to the rule. In other words, the trade policy narrative now focused on export politics and the benefits of lower tariffs in expanding markets globally. Any company in the US that wanted protection via higher tariffs had to apply to the executive branch for an exception to the rule via the trade adjustment assistance program and others. This removed the tremendous political pressure to increase tariffs that the members of Congress had faced prior to 1934. Another way to look at this is that the only participants in tariff policy prior to 1934 were US companies who desired protection and did not want to compete with foreign companies. After 1934, US companies who wanted to open up global markets by reducing tariffs were now involved in the decision-making process and this group was favored by the executive branch which now had the power to set US trade policy.

Every President since FDR has promoted this trade policy narrative regardless of political party until Donald Trump. After WWII, the US took the lead to create global institutions and processes such as most favored nation status and periodic international trade sessions which would make it easier to reduce tariffs. This was the primary reason for the creation of the General Agreement on Tariffs and Trade in 1947 and the World Trade Organization in 1995. By any measure, tariffs were reduced tremendously since then because of the lead taken by the executive branch, the change in the trade narrative, and the creation of global trade institutions. These changes ultimately created the truly global, integrated, and open economy led by the United States and dramatically increased global wealth.

This tariff decision making system with the executive branch taking the lead works well as long as the President and the Congress agree that lower tariffs are the rule and higher tariffs are the exception. This changed with the election of President Trump who is a supporter of higher tariffs and the use of tariffs as a negotiating tool to achieve whatever he wants such as punishing a country for putting a former president in jail. In his second term, President Trump almost exclusively used the 1977 International Emergency Economic Powers Act to use tariffs as a bargaining tool and to raise tariffs unilaterally without Congressional input whatsoever.  The act had never been used for that purpose.  The Supreme Court rejected his use of the law to raise tariffs just yesterday.  Trump immediately used section 122 of the 1974 Trade Act to reimpose tariffs, but they can only remain in place for a maximum of 150 days.  Congress can vote to support or not support them anytime during the time frame.

The Trump practices of raising tariffs and using tariffs as a negotiating tool violate the post-WWII practices, norms, principles, and international law that the United States, as the global hegemonic power, created at the end of WWII. Despite the high tariff policies of the Trump administration, most Democrats and Republicans in the House and Senate support lower tariffs as the rule and higher tariffs as the exception to the rule. Most US businesses and consumers oppose Trump’s tariff policies as they face higher prices.  Trump has done tremendous, if not irreparable, damage to the open, global, rules-based economy from which the United States and the rest of the word has benefitted since the end of WWII.  Trump’s policies have created tremendous uncertainty in global markets, supply chains, and trade relationships.  Traditional economic allies no longer trust the United States.  The trade practices, norms, rules, and principles set by the United States and followed by most countries since the end of WWII appear to no longer apply.  The global trade rules are in flux.  Trump has pushed many of our traditional allies, such as Canada, to making trade deals with China.  His policies have unwittingly played into the hands of the primary challenger, China, to the once leading role of the US in the international political economy.  This period of global economic uncertainty benefits no one.  Is this the end of the US as the global economic hegemonic power?  We shall see…vamos a ver.