How Tariffs Can Help America

Smoot-Hawley was implemented at the beginning of the Great Depression, when countries around the world were already engaged in the currency depreciation, import restrictions, and tariffs that English economist Joan Robinson would later characterize as “beggar-my-neighbor” policies. As Robinson explained, these policies expand domestic growth by sub

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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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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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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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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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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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Overall, the modern American economy is very different from the one of 1930. In fact, when it comes to trade, the two are almost opposites. The United States now has by far the largest trade deficit in history. That means Americans invest and (mainly) consume far more than they produce. U.S. consumption in the 1920s, in other words, was too low rel

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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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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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