How Tariffs Can Help America

Americans consume far too large a share of what they produce, and so they must import the difference from abroad. In this case, tariffs (properly implemented) would have the opposite effect of Smoot-Hawley. By taxing consumption to subsidize production, modern-day tariffs would redirect a portion of U.S. demand toward increasing the total amount of

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These tariffs would still come with domestic risks. But for economists to suggest that the effect of tariffs in 1930 must be the same as today only shows how muddled most economists are about trade. The real lesson of Smoot-Hawley is not that the United States cannot benefit from tariffs, but rather that persistent surplus economies should not impl

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Like most industrial and trade policies, tariffs operate by transferring income from one part of the economy to another, in this case from net importers to net exporters. They do this by raising the price of imported goods, which benefits the domestic producers of those goods. Because household consumers are net importers, tariffs are effectively a

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Economists weren’t always so mixed up. In his classic 1944 book, International Currency Experience , Ragnar Nurkse wrote that “the devaluation of a currency is expansionary in effect if it corrects a previous overvaluation, but deflationary if it makes the currency undervalued.” Tariffs, which are close cousins of currency devaluation, act in the s

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But there are two very different ways by which tariffs can lower consumption as a share of GDP. One way is by increasing GDP as a whole. This happens when a tariff’s implicit subsidy to production results in more jobs and higher wages, which in turn leads to an overall increase in total consumption. The higher savings—or the gap between the increas

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The other way, however, involves decreasing consumption as a share of GDP by suppressing consumption itself—not by fostering overall economic growth. This occurs when tariffs raise the price of imported products without raising wages, making it harder for people to purchase goods. Such tariffs do not produce a rise in production because domestic pr

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The reason behind this imbalance was understood by Marriner Eccles, chairman of the U.S. Federal Reserve from 1934 to 1948, who argued that high levels of income inequality in the United States were in effect “a giant suction pump” that had “drawn into a few hands an increasing portion of currently produced wealth.” Because the rich consume a far l

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Smoot-Hawley was a failure at its time, but its failure tells analysts very little about the effect that tariffs would have on the United States today. That is because now, unlike then, the United States is not producing far more than it can consume. Ironically, the history of Smoot-Hawley says a lot more about how tariffs today would affect a coun

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This consumer-to-producer shift means tariffs have repercussions for a country’s gross domestic product, or the value of the goods and services produced by its businesses and workers. Because everything an economy produces is either consumed or saved, any policy that raises production relative to consumption automatically forces up the domestic sav

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