Commerce, Economy / Finance, Populism

Who Will Survive the Trade War?

Jun 7 2019

By Margaret O’Mara* – The New York Times

History shows that big businesses profit most when tariffs reign.

America is entering a new era of tariffs. President Trump is in no hurry to resolve the trade dispute with China, he is adamant about imposing tariffs on Mexico, and farmers and companies are trying to figure how to withstand them for months or years, not weeks.

This is not unprecedented. For the first half of America’s history, high protectionist tariffs were the norm. Even then, they didn’t work as intended. Rather than protecting workers and farmers, over time, tariffs did exactly the opposite, and big businesses were well placed to take advantage.

Tariffs are as old as the republic itself: The first substantive piece of legislation passed by Congress, on July 4, 1789, placed a 5 percent tariff on most imported goods, with special duties to protect domestic products like wine and candles. Imposed when government was small and taxes were close to nonexistent, tariffs ballooned in size and scope as the nation grew after the Civil War. By 1912, they topped 40 percent and made up close to half of federal revenue.

The tariff didn’t create Gilded Age monopolies, but it abetted their rise. Powerful industries lobbied Congress for special treatment — a tariff raised here, a barrier strategically lowered there — resulting in a tariff regime that strongly favored those with the most money and political clout.

An especially notorious example was the sugar trust, which gamed the tariff classification system to control nearly all of the lucrative market for refined sugar. The trust idled sugar refineries and took over smaller competitors, limiting supply and driving up prices. As one economist said in 1906, “The tariff breeds trusts as naturally as a Jersey swamp breeds mosquitoes.”

The same may happen again. Although large American companies have been among the trade war’s sharpest critics, they have the deep pockets and influence to persuade policymakers to make exceptions. Lobbyists for both foreign and domestic interests have already pressed for and won exemptions from the new rules, sparing (at least temporarily) everything from aluminum to Apple Watches. Meanwhile, smaller manufacturers are left struggling to remap supply chains and hold on to customers.

Farmers in the Gilded Age hated tariffs, which inflated freight charges and the price of equipment, as well as the cost of everyday household goods. Instead of selling their products more cheaply, some American manufacturers raised prices to match imports: a yard of domestic cotton cloth that cost 6 cents to manufacture sold for nearly five times that at the dry goods store. Coffee, on the other hand, which was exempt from tariffs, was only a third the cost of sugar.

Part of what made protectionism so painful was that, by the late 1800s, agriculture was closely tied to the global financial system. Over 60 percent of American exports — grain from Iowa and cotton from Arkansas — were agricultural. For 19th-century farmers, open access to foreign markets could mean the difference between riches and ruin. Today, American agriculture is even more tied to global markets.

In 1912, the fury on the farm and widespread popular frustration propelled not only a referendum on the tariff, but on the broader role of government. Republicans had been the tariff’s strongest supporters. Democrats, champions of farmers as well as of a small federal government, opposed them. By the start of the 20th century, however, reformers in both parties were calling for change. This was not only a financial issue, they cried, but a moral one: Tariffs were making business and government richer, and leaving ordinary people behind.

In the presidential election of 1912, the Republican incumbent, William Howard Taft, bore the brunt of this political anger. The tariff reform he promised upon entering office turned out to be feeble, prompting a schism in his party. A former president, Theodore Roosevelt, broke away from the Republicans to become the standard-bearer of a new Progressive Party that made tariff reform a key part of its platform.

“The existing concentration of vast wealth under a corporate system, unguarded and uncontrolled by the Nation, has placed in the hands of a few men enormous, secret, irresponsible power over the daily life of the citizen,” the Progressives declared. “We demand tariff revision because the present tariff is unjust to the people of the United States.”

The Democrats sounded a similar note, pronouncing the tariff “a system of taxation which makes the rich richer and the poor poorer.” They called for broad-based reform of the tariff system to eliminate the worst offenders. Woodrow Wilson, the Democratic nominee for president, promised, “And now we are going to go into this garden and weed it.”

Wilson edged out Roosevelt on Election Day. The message from American voters was clear: Tariff-fueled protectionism didn’t match the economy the United States had become. It piled too much wealth and power in the hands of the already wealthy, it encouraged political favoritism and corruption, and it left workers and farmers behind.

The tariff had become such an odious symbol of corporate excess, in fact, that it created considerable political support for something long considered anathema: a federal income tax, which could replace the revenue lost from abolishing tariffs. Making the income tax even more politically attractive was that, at first, only the very richest Americans paid it.

The following year, Wilson and Congress slashed the tariff from 41 percent to 27 percent. The states ratified the 16th Amendment, permitting a national income tax. From then on, the tariff would never exceed 5 percent of federal revenue. Today it stands at less than 2 percent.

The economic landscape is different today, but the stakes are just as high. Protectionism may have great appeal when industrial jobs are easily moved overseas and fa  mily farms diminish by the year. But trade policy alone cannot reverse these trends. We don’t yet know whether 2020 will be as much of a watershed election year as 1912. One thing is clear: 19th-century policy solutions were inadequate to meet the problems of the 20th-century economy. They certainly won’t fix the problems of the 21st.


*Margaret O’Mara (@margaretomara), a professor of history at the University of Washington, is the author of the forthcoming book “The Code: Silicon Valley and the Remaking of America.”


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