Arguably the biggest event in the financial markets this year so far has been the Reciprocal Tariff Policy introduced by the US government, under the Trump administration, last week. The policy is based on calculations that appear haphazardly made-up. Regardless of the intellectual-legitimacy of the Reciprocal Tariff Policy, if the new tariff rates hold, they will represent the highest weighted average tariff rate implemented by the US in more than 100 years, according to investment bank Evercore.
In uncertain times like these, there is some usefulness to learn from history. There’s a presentation from the FDRA, a US-based trade organisation representing the footwear industry, that looks back at past episodes of major increases in US tariff rates going back nearly 250 years. The presentation is fantastic – I encourage anyone reading this article to also look at the whole deck – and I want to document my takeaways for easy reference in the future. My notes:
- There have been five instances since 1776 – and before the recent Reciprocal Tariff Policy – where the US had raised tariffs significantly and they happened in 1828, 1890, 1922, 1930, and 2018; the 1930 episode is commonly known as the Smoot-Hawley tariff era.
- In past episodes of higher tariffs, US consumers had to pay higher prices each time.
- When the US raised tariffs in the past, its trading partners always introduced retaliatory trade-related actions against the US.
- The political party that pushed for the higher tariffs was subsequently voted out in the next voting cycle.
- The 1930s Smoot-Hawley tariffs occurred when the US was running a major trade surplus, unlike today, when the US has a substantial trade deficit. In fact, the current trade deficit is a major driving force for the Trump administration introducing the Reciprocal Tariff Policy.
Although the lessons from history are useful, it’s also important to note that they can at best be used to form expectations and not predictions. It’s anybody’s guess as to what happens next with the US’s trade policies and thus the US economy.
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