How do the high tariffs in the United States come to an end?

Source: Industrial Research, Authors: Zhang Lihan, Guo Yuwei, Lu Zhengwei

Summary

In the United States, the phenomenon of rising trade protectionism occurs every few decades. The objectives of trade policy can be attributed to three "R"s: Revenue, Restriction, and Reciprocity. Accordingly, the trade policies of the United States since its founding can be divided into three stages:

The first was the protectionist period from 1789 to 1933, during which tariffs fluctuated dramatically. Between the American Revolutionary War and the Civil War, the United States was still in the early stages of industrialization, and the protection of infant industries and the increase of fiscal revenue were the main reasons for the United States to raise tariffs. From 1863 to 1933, as tax sources diversified, protecting industries and defending the gold standard became the main reasons for the United States to raise tariffs. The second was the period of free trade from 1934 to 1973, when American industry had matured and the promotion of exports through reciprocal agreements became the main goal, and tariff levels fell sharply. However, in the early 70s, when the relative strength of American industry weakened and the balance of payments was imbalanced, trade protectionism reared its ugly head. Third, since 1974, the United States has entered a new stage of trade policy with low tariffs but complex non-tariff barriers.

The rise and fall of trade protectionism in the United States several times shows that: First, protecting domestic industries, improving the balance of payments, and reducing the fiscal deficit are the constant motives of trade protectionism. Second, the high tariff policy that goes against the tide of history is doomed to be unsustainable, and with the deepening of globalization, the duration of high tariffs is getting shorter and shorter. The odious Tariff Act, the Smoot-Hawley Tariff Act, and Nixon's high tariffs took a turn five years, four years, and less than a year later, respectively. The Dingli tariff law alone coincided with a significant increase in global gold production and lasted for a longer period of time. Third, the direct causes of the end of high tariffs are more complex, and the dissatisfaction of the American people with high prices, the opposition of domestic interest groups, and the countermeasures of trading partners may cause a turning point in trade protection. Fourth, the inflection point of tariff policy is usually accompanied by fundamental changes in the monetary system, such as a sharp depreciation of the US dollar or a significant increase in gold production. This means that there may be a trade-off between the monetary system and tariffs, and that excessive balance-of-payments imbalances will eventually have to be corrected.

I. Overview of Major U.S. Tariff Legislation

Irwin (2017) argues that the historical objectives of U.S. trade policy can be attributed to three "R's": Revenue, Restriction, and Reciprocity. In terms of revenue, tariffs can enhance government fiscal income; regarding restriction, tariffs can limit foreign imports to protect domestic industries; and in terms of reciprocity, reaching tariff reciprocity agreements with foreign countries can promote U.S. exports. Based on these three objectives, a review of U.S. history since its founding reveals that the country's attitude towards tariffs and trade issues can mainly be divided into three stages.

1.1 Period of Trade Protectionism

From 1789 to 1933, the United States was in a stage of gradual industrialization and economic takeoff, during which trade protectionism prevailed in the U.S. for the purpose of protecting domestic industries. During this period, the need to raise military funds and defend the gold standard also temporarily reinforced the inclination towards trade protectionism domestically. Economic downturns and rising prices could serve as motives for lowering tariffs, while a more flexible exchange rate system (abandoning the gold standard) paved the way for tariff reductions.

1.1.1 From the end of the War of Independence to before the Civil War: Protecting infant industries and raising military funds

Between 1789 and 1862, roughly corresponding to the period between the American Revolutionary War and the Civil War, the United States was still in the early stages of industrialization. Protecting nascent industries and increasing fiscal revenue were the main reasons for raising tariffs. During this phase, tariffs typically contributed around 90% to U.S. fiscal revenue, and the comprehensive tariff policy was mainly concentrated in this period. However, we can observe that the level of tariffs fluctuated greatly during this stage, as tariffs, while protecting the development of American industry, harmed agricultural exports, thereby affecting the "cake" of the Southern interest groups in the United States.

In the 1820s, the Industrial Revolution in the United States began to accelerate. In 1818, James Monroe, the fifth President of the United States, proposed in his congressional message that "tariffs should especially protect nascent industries and industries closely related to national independence." In 1828, the Adams administration passed a tariff law to protect the development of American domestic industry, raising the average tariff level on taxable products in the United States to 44.8%. This tariff law was later referred to as the "Tariff of Abominations" by the Southern interest groups in the United States.

From the perspective of the impact of tariff laws, the tariff law intensified the contradictions between interest groups in the North and South of the United States. There are economic conflicts between the industrial states in the North and the agricultural states in the South; Northern states tend to favor high tariffs to protect local industries, while Southern states, which rely on exporting agricultural products, prefer low tariffs to promote exports. In opposition to the Southern interest groups, Congress reduced tariff rates twice in 1830 and 1832, but after the Jackson administration signed the Tariff Act of 1832, South Carolina declared the tariff laws of 1828 and 1832 unconstitutional and threatened to secede from the federal government.

In 1833, Congress passed a compromise bill that stipulated a gradual reduction of tariffs from 1834 to 1842, until all tariffs were lowered to 20%, which temporarily quelled the debate over tariffs between the Northern and Southern interest groups. However, with the change of government elections, the mutual struggles between the Northern and Southern interest groups did not cease. In 1837, an economic crisis hit the United States, and in 1842 the "Black Tariff" was enacted, raising the level of tariffs again. After the economic crisis passed, the "Walker Tariff Act" was passed in 1846, which lowered the tariff levels. It wasn't until 1861 that the American Civil War finally broke out. In 1861, the "Morrill Tariff Act" was enacted to raise military funds during the war. Against the backdrop of high government debt in the United States, the long-term governance of the Republican Party post-war led to an extended period of high tariff levels in the country.

1.1.2 From the Civil War to the Great Depression: Protecting Industry and Defending the Gold Standard

From 1863 to 1933, with the improvement of the tax system, considerations for protecting industries and defending the gold standard became the main reasons for the United States to raise tariffs. From 1863 to 1913, as the contribution of other taxes (such as consumption taxes) to fiscal revenue expanded, the contribution of tariffs to U.S. fiscal revenue decreased to around 50%. After the income tax was passed in 1913, the proportion of tariffs in U.S. fiscal revenue further declined, falling below 20% from 1917 to 1933. At the same time, we can also observe that since 1863, the average import tariff for all goods in the United States and the average import tariff for taxable goods have shown a trend of divergence, reflecting that the United States began to impose tariffs selectively on certain industries to protect the development of domestic industries.

At the end of 1892, the collapse of the Baring Brothers triggered a run on the Baring Brothers, as well as a sharp monetary tightening, and led to the bankruptcy and collapse of many American railroad companies, the American economy fell into recession, American industrial production fell by 17% from its peak in May 1892 to its trough in February 1894, the unemployment rate jumped from less than 4% in 1892 to more than 12% in 1894, and a large amount of gold flowed out of the United States, and the United States was "on the gold standard" of monetary systems have been shaken (Irwin, 2017). In 1896, McKinley was elected president, and in 1897 the McKinley administration signed the "Dingley Tariff Act", which increased the average tariff level of taxable products in the United States from 40.2% in 1896 to 52.4% in 1899, which was the highest average tariff level for taxable goods after the American Civil War and before the Great Depression in 1929. In his inaugural address, McKinley emphasized the need to reduce fiscal deficits and strengthen tariff protections for U.S. industry. McKinley argues that higher tariffs will improve the fiscal deficit, reverse gold outflows, and help restore the country's prosperity and provide protection for industry.

From the perspective of the impact of the tariff law, it is relatively fortunate that around the same time McKinley enacted the tariff law, the world gold supply began to increase rapidly with the rise in supply from Australia, South Africa, and Alaska. Under the "gold standard" monetary system, the loosening of global monetary conditions facilitated economic recovery, and asset prices began to rise again. However, this somewhat coincidental timing led people at the time to generally believe that McKinley's tariff law was the reason for the economic recovery (Irwin, 2017).

From 1895 to 1900, the export value of American manufactured goods doubled, with the proportion of exports rising from 26% to 35%, and the export volume of manufactured goods grew by an astonishing 90%. The recovery of the global economy was one of the reasons for the surge in American exports. The increase in manufactured goods exports strengthened the bargaining power of some U.S. domestic producers with export demands, and questioned the necessity of high protective tariffs that restricted imports, ultimately leading to the idea of reciprocity as a new avenue for trade policy. In fact, Section 3 of the Dingley Tariff Act authorized the president to reduce certain tariff rates on a specific list of goods for countries that made "equivalent concessions" to U.S. products. However, in practice, most of the reciprocal treaties reached with foreign nations that McKinley submitted to Congress were not approved.

After entering the 20th century, the rising cost of living and the issue of trust monopolies caused by increased industrial concentration at the end of the last century sparked discussions in American society about high tariffs. Although economists expressed skepticism about the view that tariffs would lead to rising inflation and increased industrial concentration, the progressive faction within the Republican Party ultimately prevailed, and in 1909 Congress passed the Payne-Aldrich Tariff Act, significantly lowering tariff rates (Irwin, 2017).

1.1.3 The Great Depression: Protecting Industry and Defending the Gold Standard

The Great Depression in the United States, which began in 1929, once again triggered a decline in net exports and a gold outflow. To mitigate the impact of the Great Depression, the United States chose to raise tariffs in a manner similar to the late 19th century. In 1930, the Hoover administration enacted the Smoot-Hawley Tariff Act, which further expanded the scope and levels of tariffs on top of the already high tariffs, raising the average tariff level on taxable products in the U.S. from 40.1% in 1929 to 59.1% in 1932. The Hoover administration hoped to protect jobs and alleviate the economic crisis by raising tariffs.

From the perspective of the impact of tariff laws, after the implementation of the Smoot-Hawley Tariff Act in the United States, major trading partners of the U.S. began to impose tariffs on it. From 1929 to 1933, the value of U.S. imports and exports both fell by more than 50%. However, the decrease in imported goods did not stimulate domestic production in the U.S.; the average annual GDP growth rate from 1929 to 1933 was -7.4%. At the same time, the unemployment rate in the U.S. surged, and the economy experienced severe deflation, with the unemployment rate reaching 24.9% in 1933. The average annual CPI year-on-year from 1929 to 1933 was -6.8%.

As we mentioned in April 2025 in Trade Wars in the 30s of the 20th Century: A Narrative of a Monetary System, the fixed exchange rate under the gold standard was the crux of the economic depression that began in 1929, so abandoning the gold standard and devaluing the local currency became the first policy measure implemented by various countries. In September 1931, Britain announced that it was abandoning the gold standard, and the pound depreciated by 30%, and by 1935, the British exchange rate had depreciated by 141% relative to the gold parity of 1929. Some countries that are more closely pegged to the pound sterling, such as Denmark, Sweden, Norway, etc., have also abandoned the gold standard and devalued their currencies (Eichengreen & Sachs, 1985). This effectively expanded the money supply, alleviated deflationary pressures, and increased export competitiveness, thereby facilitating the economic recovery of countries that abandoned the gold standard. At the beginning of Britain's abandonment of the gold standard, the United States still adhered to the gold standard, and the economy fell into a deflationary-recession spiral. The continued economic downturn led to growing dissatisfaction with the Hoover administration in the United States, and finally Hoover was defeated by Roosevelt in the 1932 presidential election.

After Roosevelt took office, he immediately implemented the Emergency Banking Act and the Gold Reserve Act in March 1933 and January 1934, gradually abandoning the gold standard. Subsequently, in June 1934, both houses of the U.S. Congress passed the Reciprocal Agreements Act of 1934, which amended the Tariff Act of 1930. The main contents included: first, authorizing negotiations for tariff agreements with foreign governments or institutions, allowing the president to enter into trade agreements with foreign governments without Senate approval, modifying existing tariffs and other trade restrictions, with an adjustment cap of 50%; second, adhering to the principle of unconditional most favored nation treatment for tariffs. After the passage of the Reciprocal Agreements Act, from 1934 to 1939, the United States signed a total of 22 trade agreements aimed at reducing their respective tariffs with other countries (Tan, 2010), and the average tariff rate on taxable goods in the U.S. dropped from 59.1% in 1932 to 37.3% in 1939.

1.2 Period of Free Trade

From 1934 to 1973, the United States was the largest industrial nation in the world. During this period, the U.S. championed free trade and promoted American exports through reciprocal agreements. However, in the early 1970s, as the relative strength of U.S. industry weakened and the balance of international payments became imbalanced, trade protectionism re-emerged.

Since the enactment of the Reciprocal Trade Agreements Act in 1934, the United States has reduced tariffs to promote trade through bilateral and multilateral free trade systems, maintaining a relatively low tariff level for a long period of time. The average tariff level on taxable products in the U.S. fell from 46.7% in 1934 to 10.0% in 1970.

In response to domestic economic stagflation, rapid growth of fiscal deficits, worsening international balance of payments, and the dollar crisis, the Nixon administration launched the "New Economic Plan" in 1971, which mainly included wage and price controls, suspension of the exchange of gold for dollars, and an additional 10% tariff on all taxable imported goods. Among these, wage and price controls were aimed at controlling inflation, the suspension of the gold-dollar exchange was to alleviate the dollar crisis caused by the continuous outflow of gold under the Bretton Woods system, and the additional 10% tariff on all taxable imported goods was meant to ease the worsening international balance of payments. Nixon used the additional 10% tariff as a bargaining chip, attempting to exchange the cancellation of the extra tariff for the appreciation of other countries' currencies.

From the perspective of the plan's impact, the "New Economic Plan" played a certain role in stabilizing the economy and controlling inflation in the short term. The U.S. GDP growth rate rose from 5.2% in 1970 to 10.2% in 1972, while the CPI year-on-year dropped from 5.7% in 1970 to 3.2% in 1972. Subsequently, stagflation returned, and in 1974, the U.S. GDP growth rate fell back to 8.8%, while the CPI year-on-year rose again to 11.0%.

At the end of 1971, the United States reached the Smithsonian Agreement with its trading partners, devaluing the dollar against gold, while other foreign currencies appreciated against the dollar, and the U.S. also eliminated a 10% tariff. However, the exchange rates established in the Smithsonian Agreement did not last long, as the dollar faced another crisis in 1973, leading to the collapse of the Bretton Woods system.

Non-Tariff Barriers Under the Guise of Free Trade 1.3

Since 1974, the United States has protected its economy by establishing non-tariff barriers while maintaining a low overall tariff level. From 1975 to 2018, the average tariff level on taxable products in the U.S. was kept below 6%. Since 2019, the average tariff level on taxable products has increased, rising from 5.6% in 2018 to 7.4% in 2023.

During this period, the United States' trade deficit expanded rapidly. In 2024, the trade deficit of the United States was $9.2 trillion, accounting for 3.1% of the U.S. GDP, while in 1974, the trade deficit was only $4.29 billion, making up 0.1% of the U.S. GDP at that time.

2. Enlightenment

It is not difficult to find that in the United States, the phenomenon of trade protectionism rears its head every few decades. From the Tariff of Abominations in 1828 to the Dingley Tariff Act in 1897, there was a gap of 69 years; then the Smoot-Hawley Tariff Act came about 33 years later; 41 years after that, the Nixon shock occurred; and 47 years later, Trump began to abuse tariff policies.

Protecting domestic industries, improving the balance of international payments, and reducing fiscal deficits are the unchanging motivations of trade protectionism. In the early stages of American industrialization, the motivation to protect domestic industries was even stronger; as the U.S. economy matured and the dollar became the global reserve currency, the imbalance in international payments and fiscal accounts gradually became an inducement for trade protection.

But high tariff policies that have bucked the tide of history are doomed to be unsustainable, and as globalization deepens, the duration of high tariffs is getting shorter and shorter. Five years after the Abominable Tariff Act, in 1833, the U.S. Congress passed a compromise bill to reduce tariffs; Four years after the Smoot-Hawley Tariff Act, both U.S. houses passed the Reciprocal Trade Agreement Act; The deepening of globalization after World War II made high tariffs more difficult to sustain, and Nixon's policy of additional tariffs lasted less than a year. Only the Dingli tariff law coincided with the increase in global gold production and has been in place for a long time.

The direct reason for the end of high tariffs is more complex. The dissatisfaction of the American public with high prices, opposition from domestic interest groups, and countermeasures from trade partners may all lead to a turning point in trade protectionism. Regardless of the direct incentive for lowering tariffs, the turning point in tariff policy is usually accompanied by fundamental changes in the monetary system, such as a significant devaluation of the dollar or a notable increase in gold production. This suggests that there may be a trade-off between the monetary system and tariffs, and the excessive imbalance in the balance of payments must eventually be corrected.