Last Friday, in response to the Trump administration's decision to levy $34 billion worth of tariffs on flat-screen televisions, aircraft parts, and medical devices, the Chinese government imposed tariffs on $34 billion worth of American goods, including pork, soybeans, automobiles, and lobsters.

And so began Trade War 2018. Or, maybe more accurately, Tariff Mania 2018.

On an instinctual level, tariffs make sense: Protect domestic manufacturers and jobs by making foreign goods more expensive.

On a factual, historical level, trade wars and tariffs almost always fail, and often hurt the entire economy in the process. The most famous of all tariff failures, the 1930 Smoot-Hawley Tariff Act, is a prime example. The Act, sponsored by Senator Reed Smoot of Utah and Congressman Willis Hawley of Oregon, was passed at the start of the Great Depression. The bill was initially designed to protect farmers from foreign competition, but eventually expanded to include thousands of agricultural and industrial goods.

Then, as now, politicians of both parties saw the political benefit of protecting American workers against foreign competition.

The results were disastrous.

While most economists do not believe the Smoot-Hawley Act caused the Depression, there is widespread consensus that it did have a negative effect on an already bad economy. Canada, America's top trading partner, immediately responded with tariffs of its own, and exports decreased by more than 60 percent between 1929 and 1933. Smoot and Hawley both lost their 1932 reelection bids, and in 1934 the Roosevelt administration passed the Reciprocal Trade Agreements Act of 1934, which effectively ended the tariffs enacted by Smoot-Hawley.

Protectionism made a bad economic era worse--and that was in an economy that was far less globalized and far less dependent on exports than our modern economy. In a modern economy, it doesn't take long for protectionist trade policies to start harming domestic businesses. Pork producers and soybean farmers started to feel the effects of anticipated Trump administration tariffs before they even became a reality.

Tariffs are not only a shortsighted solution--they are also old and outdated. In an era where China is attempting to win the artificial intelligence race, the current American approach to economic development on a national level appears to be to repeat the mistakes of the 1930s. While I am not always a fan of Elon Musk, his recent back-and-forth with Warren Buffet about innovation versus moats is as applicable to nations as it is to companies.

As supporters of tariffs will learn, the path to prosperity goes through innovation and growth--not building a moat in an inevitably doomed attempt to protect what you have. 

Published on: Jul 9, 2018