A Brief History of Strategic Tariffs in the U.S.

An article published on May 29 in the IMF’s F&D Magazine champions the use of U.S. tariffs as a potential policy instrument. It opens with a provocative challenge to the free trade narrative, suggesting that trade policies in the U.S. and globally have been shaped more by theoretical models than by actual data:

However, the United States boasts a rich history of utilizing tariffs strategically, particularly from the late 1800s to the mid-1900s. Douglas Irwin explores this historical trend in his enlightening 2017 book Clashing Over Commerce, which serves as a primary source for much of the information presented here. During this era, global trade surged as technological advancements lowered transportation and communication costs. Yet, like today, protectionism found its supporters, leading to various attempts to shield American firms and workers from foreign competition.

Despite its appeal, protectionism has historically faced significant hurdles in the U.S. The nation’s vastness often results in competing regional interests that dominate Congressional decision-making, complicating the passage of protectionist measures. While some tariffs have been enacted over time, they frequently faced unpopularity and were quickly repealed.

In the late 19th century, the concept of reciprocal tariffs captured the political imagination. Much like contemporary arguments, the premise was straightforward: American businesses were purportedly suffering due to foreign nations’ unfair practices. If the U.S. government could leverage tariffs to pressure these nations, it could encourage them to lower their tariffs on American goods, thereby bolstering U.S. exports. This culminated in the 1890 McKinley Tariff Act, which established varying tariff rates for different countries and granted the president authority to negotiate foreign tariffs, threatening hikes if other nations did not reciprocate. While this strategy resulted in ten agreements, the 1892 shift in Congressional power to the Democrats led to the act’s repeal in favor of universal tariff rates, infuriating those nations that had previously engaged in agreements, causing them to retaliate with tariffs on U.S. products.

A few years later, as the Republican Party regained control, the Dingley Tariff Act of 1897 was enacted, again empowering the president to threaten increased tariffs and reduce them by up to 20% on specific goods if other nations lowered their tariffs. Eleven agreements were reached under this act, but the Senate ultimately rejected all of them.

Douglas Irwin notes that only three successful reciprocity treaties were established between 1844 and 1909 (Clashing Over Commerce, table 6.4, p. 309). The majority were either turned down by the Senate or rejected by the other country after adjustments demanded by the Senate were made.

The early decades of the 20th century witnessed a general trend towards trade liberalization, a movement disrupted by World War I. As the Great Depression unfolded in 1930, protectionism re-emerged, leading to the Smoot-Hawley Tariff Act, which ignited a global trade war. Recognizing the destructive nature of this conflict, nations convened in London in 1933 in hopes of negotiating a reversal, but failed to yield an agreement. The following year, Congress enacted the Reciprocal Trade Agreements Act (RTAA), empowering the president to negotiate trade agreements with considerable latitude, including raising or lowering tariffs by up to 50% of Smoot-Hawley levels in exchange for concessions from other nations. Crucially, the RTAA classified these agreements as executive agreements requiring only a simple Senate majority for approval, in contrast to the two-thirds majority required for treaties. Under this framework, 19 agreements were established from 1934 to 1939, and by 1945, 32 agreements had been signed. This marked a significant uptick in reciprocal trade deals, with the Roosevelt Administration achieving more agreements in 11 years than the previous century combined.

Ultimately, the RTAA paved the way for GATT and later domestic legislation like the Trade Expansion Act of 1962 and the Trade Act of 1974. However, these latter frameworks did not replicate the RTAA’s success in leveraging tariffs strategically. Instead, bilateral agreements emerged as a more effective means for achieving negotiation objectives.

Contrary to the assertions made in F&D, the strategic use of tariffs in the U.S. has a complex history marked by varying degrees of success. I argue in a recent working paper that a government’s institutional structure plays a pivotal role in determining the effectiveness of strategic tariffs. Successful instances often occurred when the executive was compelled to reduce tariffs, and Congressional approval could be secured with a simple majority. Conversely, negotiations typically faltered when such credible commitments were absent.

The challenges in the U.S. context stem from the nature of tariff legislation itself. As taxes, tariffs fall under Congress’s exclusive purview (as reiterated in Learning Resources v Trump), necessitating Congressional approval. Moreover, when tariffs are part of treaty negotiations, any agreement must receive a two-thirds Senate vote (U.S. Constitution, Article 2, Section 2). With competing economic interests influencing Senate votes, achieving a supermajority is exceedingly challenging due to the high barriers in place. The brilliance of the RTAA lay in its balance, allowing Congress to delegate just enough power to the president to act as a credible negotiator while still binding him to his commitments through law. Other reciprocal trade initiatives either constrained presidential authority excessively (as seen with the McKinley and Dingley tariffs) or granted it too much arbitrary power (exemplified by the Trade Act of 1974).

More broadly, the conditions for the strategic use of tariffs are exceptionally stringent (refer to “The Economics of Section 301: A Game-Theoretic Guide” by John McMillan in Economics and Politics 2(1), 1990). In summary:

1. The nation being threatened must face substantial harm if excluded from that market.
2. The nation being threatened must lack the capacity for significant retaliation.
3. The cost of compliance for the threatened nation must be minimal.
4. The threatening nation must perceive greater benefits from liberalization compared to the threat posed.

Such conditions are rare under even the best circumstances and likely diminished as globalization has progressed. Incorporating these institutional frameworks further complicates the successful implementation of strategic tariffs.