In the current discourse on declining GDP, one can’t help but notice how the national conservative and protectionist factions have eagerly pointed fingers at imports as the main culprit. Pierre Lemieux, in his insightful analysis, dismantles this notion effectively, so there’s little need to rehearse those arguments here. It suffices to remind ourselves that GDP calculations embrace only domestic production and consumption; thus, the net export figure merely negates the portion of consumption tied to imports, effectively yielding a net zero. Consequently, advocating for higher tariffs as a means to shield GDP from foreign goods is, quite frankly, a nonsensical proposition.
Conversely, the imposition of tariffs does wield a measurable negative influence on GDP. According to the Tax Foundation, the existing 10 percent baseline tariff is projected to elevate the effective tariff rate to 12.1%—and that’s before we even consider retaliatory measures. This could shrink GDP by 0.7 percent (again, pre-retaliation) and slash market income by 1.2 percent by 2026. In household terms, this translates to an average tax hike of $1,190 in 2025 and $1,462 in 2026, alongside a contraction in the availability of goods and services. Yale’s Budget Lab presents an even bleaker forecast, estimating an effective tariff rate of 22.5%, an average loss of $3,800 per household due to a 2.3% uptick in price levels, and a continuous GDP decline ranging from 0.4 to 0.6 percent—again, merely short-term predictions that do not even factor in retaliatory impacts from trade partners.
Growth from 1870 – 1910
Economic historians will find nothing surprising in this scenario. The 1870s saw tariffs averaging around 35 percent, yet GDP suffered an average decline of 0.5%, despite some industries enjoying protective measures. The period from 1870 to 1913 marked a rapid evolution from an agrarian to an industrial economy. Between 1872 and 1913, the US share of global manufactured exports surged from 2 percent to 14%, while the agricultural labor market shrank from 48 percent to 32%. Interestingly, during this time, the share of national income allocated to agriculture dipped by 3 percent, while manufacturing’s share surged by 5 percent. Notably, exports of crude materials and foodstuffs experienced a slight decline—after all, people must eat, and exports of finished goods effectively doubled.
One could logically assume that this transformation should have spurred domestic growth, but alas, the political machinery intervened. If manufacturers had merely recognized their inherent comparative advantage in raw material access, they might have thrived. Iron ore deposits near Lake Superior bolstered iron and steel producers, while the discovery of petroleum and coal enabled competitive pricing against foreign producers reliant on imported resources. While these resources were not limitless, they were relatively abundant at the time.
Instead, manufacturing interests lobbied for protective tariffs against foreign competition. If, as national conservatives argue, such protection genuinely benefits the general welfare, one would expect productivity to rise and prices to drop. Yet, as Douglas Irwin illustrates in Clashing over Commerce: A History of US Trade Policy, productivity growth in the US during this era did not outpace that of Great Britain, which had fewer natural resources and a slower-growing population. In fact, productivity increased in sectors unaffected by trade, such as transportation and utilities, while agriculture and manufacturing saw declines.
This is not to say that manufacturing output did not increase; it did. However, the political nature of imposed tariffs not only insulated American manufacturers from foreign competition but also shielded them from the advantages that competition brings. An influx of less efficient manufacturers emerged, failing to achieve necessary economies of scale, while innovation lagged compared to nations like Great Britain, which imposed minimal tariffs. Between 1870 and 1913, British manufacturing grew at an average annual rate of 2.2 percent, while manufacturing employment increased by 30 percent, fueled by a 76 percent rise in capital per worker.
By 1890, both America and Germany were catching up to Britain, ironically, because their lower tariff structures facilitated the exchange of ideas, processes, and technologies. While America emphasized formal education for business executives, Germany focused on vocational training that combined formal instruction with apprenticeships. However, the true catalyst for America’s rise as an industrial powerhouse was the population boom of the 1890s.
Remember our previous discussion about growth in non-traded sectors like transportation and communication? This evolution paved the way for national markets with goods and services flowing in all directions. As people moved freely, transportation costs decreased, driven by demand, allowing workers to transition from rural areas to urban centers. This influx of labor enabled large factories to emerge alongside smaller workshops, which had previously characterized the manufacturing boom. In 1880, agricultural workers outnumbered manufacturing workers by three to one, but by 1920, manufacturing employment surged from 2.5 million to 10 million.
Not all of this labor force expansion—and the subsequent GDP growth—was internal. The emergence of higher-wage jobs around 1890 triggered a significant immigration wave. Between 1870 and 1900, the native-born population doubled, largely due to higher wages, improved living standards, and access to advanced medical technologies in urban environments. Beginning in 1890, immigration also doubled, soaring from approximately 7 million to 14 million. With the exception of San Francisco, most immigrants flocked to industrial cities in the Northeast and Midwest, such as Boston, Chicago, New York, Cleveland, Buffalo, and Milwaukee. By 1920, those 14 million immigrants had given rise to 23 million children, constituting one-third of the population.
Despite the tariff missteps of the 1870s that rendered manufacturing productivity inefficient and suppressed GDP, the population boom, coupled with growth in non-traded sectors, ultimately contributed to an industrial boom that fostered economic growth and rising productivity. Many economic observers regard this as the inception of the American Middle Class. Remarkably, this occurred in spite of tariffs, rather than due to them. As demonstrated by Klein and Meissner, this growth would have materialized much sooner without such protective measures.
The Folly of Smoot-Hawley
It’s often been said that there is scarcely a misguided idea that government won’t embrace, and certainly none they’ll shy away from repeating. The Smoot-Hawley Tariff Act of 1930 serves as a reflection of misguided measures from the late 1800s, akin to the McKinley Tariff Act of 1890. By the 1920s, American manufacturing had established a stronghold in global markets, lessening the political urgency surrounding tariffs. However, a fall in commodity prices in 1920, precipitated by a post-WWI slowdown, led to an agricultural depression that predated the Great Depression and dragged on for nearly a decade and a half. In essence, a world at peace no longer required massive amounts of American agricultural products, leaving farmers victims of overproduction and excessive credit. Adding to this, many soldiers returned from European battlefields to their farms, worsening the crisis.
The underlying causes of this agricultural crisis should have been evident to legislators, but rarely are politicians aware of or concerned with proximate causes. Congress’s initial response was the McNary-Haugen Farm Relief Act, first introduced in 1924, proposing both protective tariffs and price supports to prop up farmers’ profits. The plan included a federal agency to stabilize agricultural prices by purchasing surplus crops, selling them overseas, and absorbing losses at taxpayer expense. President Coolidge, perhaps understanding that no market means no market, vetoed the Act in both 1927 and 1928, effectively killing it. However, he did back then-Commerce Secretary Herbert Hoover’s plan for a farm board to stabilize prices through cooperatives, so he can’t take all the credit.
The plight of farmers became a significant issue in the 1928 election, with both Democratic candidate Al Smith and Republican candidate Herbert Hoover pledging to revise the Fordney-McCumber Tariff of 1922 to achieve “tariff equality” for agricultural goods. With little distinction between the candidates and most voters enjoying prosperity, the electorate opted for continuity, resulting in Hoover’s victory. Shortly after, Ways and Means Chairman Willis Hawley announced a hearing to revise the tariff. As Irwin notes, about 1,100 individuals provided statements to the committee, leading to 10,684 pages of testimony in 18 published volumes. Hawley then teamed up with Utah Senator Reed Smoot, and instead of merely revising the Fordney-McCumber Tariff, they introduced their own.
Democrats vehemently opposed the bill; Tennessee Senator and future Secretary of State Cordell Hull argued it would create a feeding trough for the worst kind of logrolling and special interests, while Texas’s Cactus Jack Garner criticized it as devoid of common sense or any economic principle. Despite their likely willingness to support similar measures if their party held the White House and Congress, they lacked the votes to obstruct it, and the measure passed on June 13, 1930. Hull was prescient; the Act spanned over 200 pages, imposing duties on both agricultural and manufacturing imports under the guise of protecting American agriculture.
In a striking parallel to current events, 1,028 economists signed a statement published on the front page of the New York Times, expressing a consensus that the tariffs, particularly those on manufactured products, were misguided. At that time, domestic factories already supplied Americans with 96 percent of manufactured goods, leaving exports as the only viable path to expansion and prosperity. Smoot dismissed these concerns as the foolish ramblings of academics lacking practical insight, unlike the sugar men and other special interests he had consulted.
As we know all too well, Smoot-Hawley offered little protection for agriculture or manufacturing against market realities. By not repealing and replacing Fordney-McCumber, it compounded existing tariffs, adding a 15 percent tariff increase to the previous Fordney-McCumber increase of 64 percent. After accounting for exemptions and negotiated relief, average tariff rates soared to around 60 percent, prompting a global backlash. To say the timing of this trade war was unfortunate would be an understatement, as America’s stock market crash had already initiated recessionary pressures on global markets, which were more interconnected than leaders cared to admit. Nations that retaliated against the US reduced imports by an average of 28-33 percent, while some nations indirectly protested by cutting imports from all sources, leading to a 15 to 22 percent decline in US exports. As Mitchener et al. observe, the scope of de facto retaliation far exceeded official acts of retaliation.
The Depression would have occurred regardless of this ill-conceived trade war. The decline in global GDP would have stifled trade in any case. National conservatives often argue that Smoot-Hawley had little impact, but a broader perspective acknowledging the interconnectedness of global markets would reveal otherwise. The tariff’s stated purpose was to aid farmers, who were struggling with credit defaults from loans made during WWI. The ensuing retaliatory measures only intensified their plight; moreover, manufacturing, which had been thriving on exports, also suffered from retaliation, severely weakening the one sector that had been performing well. Thus, the resulting trade war significantly influenced trade flows, exacerbating the decline in both global and American GDP.
Having thoroughly examined prior instances of high tariffs failing to produce the desired outcomes and instead leading to GDP declines, it must be noted that another popular argument among national conservatives and protectionists is that early revenue tariffs, as part of Henry Clay’s “American System,” were pivotal for national growth and economic development. This argument has been addressed ad nauseum, including by me at the American Institute for Economic Research’s The Daily Economy, so I won’t reiterate those counterarguments here.
A critical error made by many when evaluating tariffs, even among opponents, is viewing them through a linear lens, treating them as shocks to an otherwise fixed structure. Discussions rightly focus on exogenous impacts such as distorting bilateral trade volumes, disrupting supply chains, or amplifying inflationary pressures. However, few observers consider that, from a general equilibrium standpoint, tariffs endogenously skew the interwoven networks of global trade flows. In simpler terms, they create network effects with infinite non-linear differential coefficients impacting prices, supply availability, and overall welfare across the network. Tariffs redirect exports inefficiently, ultimately benefiting no one. Even if this isn’t the intention of the politicians imposing tariffs, it’s simply how tariffs operate. Ceteris paribus, a thing can only be what it is.
Additionally, it’s a fundamental characteristic of tariffs that the higher they are, the more detrimental they are to GDP. It’s merely a mathematical reality. Let’s take a brief look at that math:
GDP = C + I + G + (X – M)
Where:
C = Consumer spending
I = Business investment
G = Government spending
X = Exports
M = Imports
Pragmatically speaking, imports exert no direct influence on GDP, as the import variable cancels out the portion of consumption that accounts for spending on foreign products. However, as demonstrated, high tariff schemes can lead to an indirect negative impact on GDP. Initially, one would expect high tariffs to generate increased government revenue, which may occur in the short run. This could lead to elevated government spending, potentially triggering future inflationary pressures, as these added revenues are unlikely to be sustainable (though that’s another discussion altogether).
Higher tariffs reduce the availability of imports, which, while seemingly insignificant for direct domestic consumption measurements, does have an indirect effect through investment. Tariffs distort supply chains, inflate input costs (and consequently, end prices), and generally decrease profit margins, inefficiently reallocating resources towards domestic firms less reliant on imports at the expense of consumer choice and availability. Additionally, firms tend to decrease investments amidst rising uncertainties, which are common in global trade disputes. The resultant higher prices, along with hidden costs such as job losses in import-dependent sectors, suppress consumption.
Moreover, retaliatory measures from trade partners invariably harm exports, further depressing investment, consumption, and the revenue necessary for government spending without inciting inflationary pressures. This pattern of high tariffs has consistently played out from the late 1800s to the onset of the Great Depression. In today’s context, not only do the anticipated outcomes appear predictably grim, but the current administration’s bombastic rhetoric and unpredictable maneuvers might yield even worse results than one might envision.
Tarnell Brown is an Atlanta-based economist and public policy analyst.
