Why Trump’s trade hero turned away from tariffs

(CNN) — It’s hard to make sense of tariffs in today’s political conversation.

Voters uniformly complain about inflation, but both Republicans and Democrats are, to some degree, supportive of tariffs, or taxes on imports.

Former President Donald Trump has pledged to jack up tariffs on China and impose across-the-board tariffs on imports from other countries, something that feeds into his economic nationalism but confounds his promise to fight inflation.

Vice President Kamala Harris has lambasted Trump’s tariff plan as a tax, but President Joe Biden has maintained tariffs Trump put in place during his presidency. In fact, the Biden administration said Friday that it has finalized tariff hikes on certain Chinese-made products — electric vehicles, solar cells and other goods. Read CNN’s report on those new tariff hikes.

To learn more about tariffs and the role they play in US history, I talked to Douglas Irwin, a professor of economics at Dartmouth College and the author of multiple books, including “Clashing over Commerce: A History of US Trade Policy.”

In addition to explaining why the US moved away from tariffs in the 20th century, Irwin explained that the American figure most associated with tariffs, former President William McKinley — who Trump has said is an underrated president and cited in support of new across-the-board tariffs — was in the process of moving away from tariffs before he was assassinated in 1901.

Our conversation, conducted by phone and edited for length, is below:

A very brief history of tariffs in the US

WOLF: You wrote an entire history of US trade policy, so this is clearly an overly simplistic question for you, but what is the general role tariffs have played in the course of US history?

IRWIN: I divide it up into three parts.

Before the Civil War, tariffs were very important as a revenue-raising device for the government. It was the main tax that the federal government levied to raise revenue, pay for national defense, to pay for other expenses for the government — for paying down the national debt, what have you.

We didn’t have an income tax at that time. We didn’t really have sales taxes. There’s something called the Whiskey Rebellion. I don’t know if you ever heard of that. So sales taxes weren’t very popular.

And so it was just very efficient to collect revenue on foreign goods coming into US ports. because there’s only about a dozen ports or so, and ships have to dock, and so it made it very easy. There were no W-2s, no cash registers, so any other tax-raising mechanism was pretty inefficient.

But of course, you could also use tariffs to protect domestic producers from foreign competition. So there’s always been a tension between allowing consumers to have access to foreign goods at low prices, taxing them to raise revenue for the government and trying to keep out those foreign goods to help out domestic producers. And that tension has played out in basically every decade of US history.

Things shifted a little bit after the Civil War, because that was a very expensive undertaking. All sorts of new taxes were introduced, mainly sales taxes and excise taxes and things of that sort. And then, of course, later on, around World War I (1918), we introduced the income tax.

After that, the revenue-raising role of tariffs was really falling off the table. It’s just really a very small portion of federal government revenue. Trump, of course, wants to revitalize that, cut income taxes and rely on tariffs because other countries will pay for it.

The second era, which is from the Civil War up to the Great Depression, we didn’t need it for revenue so much, although it still raised a lot of revenue. It’s mainly used to keep out foreign goods and protect domestic producers from foreign competition.

And then, as a result of the Great Depression, we shifted. We used trade policy, or tariffs, as a form of reciprocity, where we said, OK, our tariffs are pretty high. We’ll cut our tariffs if you cut your tariffs as well.

So that’s what led to all these trade agreements, the General Agreement on Tariffs and Trade, GATT, which became the WTO (World Trade Organization), NAFTA (North American Free Trade Agreement) and other free trade agreements that we’ve reached.

What Trump gets wrong about William McKinley

WOLF: Trump was at an event recently praising William McKinley as an underrated president because of McKinley’s tariff plan, which actually came before McKinley was president. What should Americans today know about McKinley and the tariffs in the late 19th century in particular?

IRWIN: When he was chair of the House Ways and Means Committee, McKinley did usher through, in 1890, a tariff bill that became known as the McKinley Tariff. He represented Ohio, and it’s interesting: Politics in Ohio and Pennsylvania are still relatively protectionist, and the reason is the same.

The iron and steel industry was located in Pennsylvania and Ohio, and they’ve always been afraid of trying to fend off foreign competition. That was true in 1890, it was true in 1990, and it’s true today. That’s why the Trump administration, and even the Bush administration before it, tried to help out the steel industry, which is very concentrated in certain swing states in the US.

But what’s interesting is that when McKinley became president a bit later, in 1897, he began to shift because he wasn’t just representing Ohio anymore; he was representing the whole country. What he saw was we had huge industries that were really blocked from exporting to other countries.

He began to entertain this idea of reciprocity, of trying to reduce foreign tariffs by offering cuts in our tariffs. This didn’t get very far.

He was shot at a rally in Buffalo in 1901 and passed away. But the day before he was assassinated, he had given an address saying that we ought to shift US policy away from protectionism, toward reciprocity, opening up foreign markets for us, exports. So he wasn’t quite the protectionist that Trump portrays him to be.

(Note: The University of Virginia’s Miller Center has a transcript of the speech McKinley gave in Buffalo the day before he was shot. A key line proves his pivot away from tariffs: “The period of exclusiveness is past. The expansion of our trade and commerce is the pressing problem. Commercial wars are unprofitable. A policy of good will and friendly trade relations will prevent reprisals.”)

A volatile decade with tariffs and immigration

WOLF: What role have tariffs played in the American political conversation?

IRWIN: The federal government wasn’t as huge, as powerful, as it is today. It was an era of smaller government. So when you argued about what the government should be doing, you argued a lot about tariff policy, both on the revenue side or whether it should be protecting certain industries from foreign competition.

A lot of the debate very much echoes what we see today. Are big businesses helped or hurt by tariffs? Is foreign competition taking away jobs or not? Does protectionism… cause inflation?

President Trump says we had a very strong economy in the 19th century because we had these high tariffs in place. But one thing I think is underappreciated is that actually, the 1890s was a very volatile decade. Just because you have high tariffs doesn’t mean that you don’t have a lot of recessions or business cycles or high rates of unemployment. The 1890s, especially the early part, was not smooth sailing for the US economy.

This is when William Jennings Bryan was saying “you shall not crucify mankind upon a cross of gold,” because we are on the gold standard and it was very restraining. We didn’t have a Fed (Federal Reserve) back then. There was no central bank that could really fight either deflation or recessions the way we have today.

Tariffs alone don’t make for a strong economy, necessarily. They don’t ensure that you’re going to be growing rapidly. There are a lot of other causes for growth, including mass immigration. There’s a lot of immigration in the late 19th century that’s propelled the US economy.

Why the US moved away from tariffs

WOLF: Was there a conscious move away from tariffs in the political conversation, or is it something that happened naturally as they imposed the income tax and things like that?

IRWIN: (Tariffs) became less and less important. The government … could give subsidies to farmers, and then you don’t need tariffs. US manufacturing was doing reasonably well, and so tariffs just became a little bit irrelevant.

In fact, exports became more an important phenomenon. So the government begins shifting to, how can we promote exports? How can we open up foreign markets? It’s very difficult to do that if your own market is closed. The conversation evolved over time.

Today’s tariffs vs. the 1890s tariffs

WOLF: Trump imposed tariffs as president. President Biden kept those tariffs. Now, as he runs again, Trump wants to impose a 60% tariff on imports from China and a 10 to 20% across-the-board tariff on imports into the US. How do those tariffs compare with the late 19th century tariffs?

IRWIN: In the late 19th century, the tariff was levied against all countries. We didn’t really pick favorite countries, or unfavored countries. So we had an average tariff on dutiable imports, that is, those foreign goods that were subject to the tariff of about 30 to 40% or so, sometimes reaching as high as 50%. It fluctuated a bit over time, but it was uniform, nondiscriminatory across the board, on everyone.

What Trump is trying to do, the Trump average tariff … would be getting close to late 19th century levels, but not quite there. Having a 60% tariff on one particular country, that would be a novelty in the sense that we’re singling out one country for good reason, or maybe not, for really high tariffs.

That’s something we didn’t do in the 19th century. We didn’t pick which countries we like, didn’t like and have extra tariffs on the ones we didn’t like.

Can tariffs replace taxes?

WOLF: Trump says his tariffs would bring in trillions and trillions of dollars to pay for all sorts of social programs. I’ve seen fact-checks that say that’s not true. What’s your view?

IRWIN: Yeah, it’s not true. Just because how much revenue you get depends on the tax rate, the amount you’re charging, and then how big the tax base is.

Imports are only about roughly 12, 13% of GDP, I believe. So that’s not enough, when the federal government is spending a third of US GDP, or something along those lines. You have to check those exact figures.

(Note: Federal net outlays are about 22% of gross domestic product in the US, according to government figures.)

You need a lot of revenue, and you can get that by taxing income or business income, but imports are just not as large a part of the economy, so you can’t extract that much revenue.

Also, there’s demand. The more you tax imports, the fewer imports you will have, and then you don’t get as much revenue as you originally thought.

So, yeah, there’s a nice blog piece on the Peterson Institute for International Economics website on the revenue consequences of Trump tariffs.

Who has historically paid for tariffs?

WOLF: Trump says foreign countries would pay for tariffs. As a technical matter, they’re paid by US firms. CNN has written that the costs would functionally be passed on to US consumers. What does the history say about who pays for these things?

IRWIN: The Trump tariffs that he imposed in his first term (and were maintained by Biden), there have been a lot of studies that show almost a complete and 100% passthrough to consumer prices. That is, businesses can’t afford to absorb those tariffs. They just pass them on to consumers.

One analogy would be: Just about every community in the United States has a dog tax. Well, do dogs pay the tax? No, the owners pay the tax. So you think you might be taxing dogs, but they’re not the entity that ultimately pays.

You think you’re taxing countries, but they’re not the entity that ultimately pays. So there’s pretty strong evidence that it’s always passed on to consumers.

Today, it’s China. In the 1890s, it was Britain

WOLF: Trump calls himself a nationalist. Was it similarly nationalist back in the 1890s, or is this kind of a Trump-only thing?

IRWIN: It’s very similar. In late 19th century, Britain was the leading industrial power, and of course, we had fought a war to declare independence from Britain. So we weren’t the allies that we are today.

So just as we sort of don’t like China today, and we were suspicious of Japan in the 1980s, because they had a lot of industrial strength, we didn’t like Britain. It was thought to be patriotic and nationalistic if you wanted to stick it to the British by keeping them out of our markets by having high tariffs.

What’s interesting is it was the Republican Party back then, even though the Republicans became after World War II more of a free-trade party or a business party. In the 19th century, they were the economic nationalists, if you will. They wanted high tariffs, and Democrats were saying, no, no, we have to worry about consumers. We have to worry about exporters, so we need more trade to help out those groups.

So basically, throughout US history, there’s always been this tension between, do you favor consumers and exporters, or do you favor import-competing producers and their workers. And that’s the divide, whether you want high tariffs or low tariffs.

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