A Historical Look at How Tariffs Have Shaped the U.S. Economy — For Better or Worse
by Jay Robbins | Columnist, FreeWire
President Trump recently announced that the United States would impose a sweeping set of tariffs on Canada, Mexico, and China. Those tariffs would be a 25% tax on all imports from Mexico and Canada (lowered to 10% for Canadian energy) and a 10% tax on imports from China. This would mark a drastic change from recent history where Mexico, the U.S., and Canada have been a free trade zone thanks to the United States-Mexico-Canada Agreement (USMCA) signed by President Trump in 2018 and the North American Free Trade Agreement (NAFTA) signed into law by President Clinton in 1993. President Trump in recent months has also floated the idea of abolishing the federal income tax and using tariffs to make up for the revenue that would be lost by doing so. Would that work? Have we ever done this before? Let’s take a look at three–maybe three and a half–major tariffs in U.S. history for some perspective.
The Tariff Act of 1789
The first major tariff in U.S. history was passed in 1789, the same year that the Constitution went into effect. Alexander Hamilton, Founding Father and first Secretary of the Treasury, was a supporter of this tariff that charged a $0.50 per ton duty on goods imported by foreign ships (compared to the $0.06 per ton duty charged to American-owned ships). The main goals of the tariff were to raise revenue to pay off the federal debt–mostly from the Revolutionary War–as well as to protect the developing American industries.
Did it work? Yeah, mostly. Even though Southerners were largely against it as it hurt their ability to sell cotton to Europe, it is estimated to have provided up to 95% of the revenue for the federal government. It helped establish the United States on a firm financial foundation that would earn the respect of fellow nations. It is important to note that comparing the American economy of the 1790s to today is like comparing apples to Apple, the company; they may share a name, but they are two completely different things altogether.
The McKinley Tariff of 1890
Some of what makes it hard to compare our economy today to those of the distant past is that the federal government didn’t spend nearly as much money as it does now. Also, prior to 1913 there was no federal income tax. That made tariffs one of the few ways for the government to bring in some cash. Tariffs were also a way to try to limit trade and promote American manufacturing.
The era of the late 1800s is often referred to as the “Gilded Age,” as it was coined satirically by Mark Twain. What “gilded” refers to is something that is covered with a thin layer of gold. For example, an old wooden picture frame covered with a thin coat of gold to give the appearance that it is more valuable than it actually is (it’s just wood underneath, not solid gold all the way through). The economy was doing well, the wealthy class in the country was thriving, and everyone else was staying the same. It was also an era known for much political corruption, especially at the local levels of government.
This era, and the McKinley Tariff of 1890 in particular, is what President Trump has continually referred to as a time when the American economy thrived and what he hopes to go back to with his current proposed tariffs. William McKinley was a Republican Senator from Ohio when he helped to pass this legislation, and he did so with the purpose of protecting American industries. This Act raised the average tariff to almost 48%. Farmers and Democrats at the time argued that these tariffs would raise prices and limit the ability to sell agriculture overseas.
Did it work? Not exactly. The McKinley Tariffs are part of what led to the Panic of 1893, the largest economic depression in the U.S. until, well, the Great Depression. While tariffs played a role, other factors — including railroad failures and the depletion of gold reserves — also contributed to the crisis. Regardless, the tariffs restricted international trade, which hit farmers and consumers the hardest. Politically, the Republican Party took a lot of the backlash in the 1892 election as voters expressed their anger at the polls. McKinley himself would move away from his own tariffs when he became president in 1897.
Smoot-Hawley Tariff Act (1930)
In an effort to curb the Great Depression, Congress passed the Smoot-Hawley Tariff Act. The thought was that by raising import duties by 20%, there would be less competition for American manufacturers to sell their goods in the United States, which would lead to more jobs for people who were desperately in need of employment. There was also the thought that it would protect American farmers from the rough economic spiral they were already in.
Did it work? That’s going to be a big no. European countries, experiencing their own economic issues, retaliated with tariffs of their own. This led to international trade declining by nearly two-thirds in the aftermath. This lack of trade made the Great Depression even worse and more difficult to get out of.
The First Trump Tariffs
During his first term, President Trump imposed tariffs on foreign imports — largely from China. The idea was that these tariffs would be punitive in some cases, like against China for things like the theft of intellectual property or even to make up for trade deficits. He took that further and made the tariffs more targeted by taxing imports of steel, aluminum, solar panels, and washing machines. This would incite a trade war with China as well as with the European Union, which would retaliate with tariffs of their own.
Were they successful? It depends. Some American industries, such as whiskey producers, were hit hard by retaliatory tariffs, which limited their ability to export their product. Farmers also had to be bailed out by the U.S. government because China refused to buy our soybeans. Trump was able to use tariffs as a way to renegotiate NAFTA and to take a tougher stance against China.
The Currently Proposed Trump Tariffs
Finally, back to where we started! Is there anything we can take away from these historical examples to help us understand what may happen with the current Trump tariffs? Well, our economy is much more complex than it was in the 1790s, 1890s, and 1930s. The federal government spends money on things it didn’t in those eras like Social Security, much higher military spending, foreign aid, unemployment insurance, and many others that are too plentiful to list. It is doubtful that revenue raised from tariffs would be enough to fund the federal government enough to eliminate the federal income tax without drastic cuts to government spending.
While tariff revenue could help reduce the federal debt, it is unlikely to replace income tax revenue entirely. That being said, both Mexico and Canada have already threatened retaliatory tariffs which could create hardships for the American people.
If President Trump is serious about using tariffs to raise revenue and to protect American businesses, history would suggest a more targeted approach. Blanket tariffs tend to slow international trade and hurt American consumers. It will take more than tariffs alone to bring back manufacturing jobs that have been offshored over the past few decades. A combination of targeted tariffs and government policy aimed at promoting American manufacturing would be a more pragmatic approach.
About the Author: Jay Robbins
Jason Robbins is a Tiffin resident and a history enthusiast with a passion for exploring how the past shapes the present. He enjoys breaking down complex topics in a way that makes history relevant and engaging. A lifelong Detroit Lions fan, he’s well-acquainted with patience and resilience — traits that also come in handy when debating economic policy.
His favorite authors include Kurt Vonnegut and David McCullough, and he will be unalived on that hill defending Point Break (1991) as the greatest movie ever made. When he’s not writing or reading about history, you can probably find him rewatching Point Break and reminding everyone why Keanu Reeves and Patrick Swayze’s surf-crime masterpiece deserves more respect.
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