President Trump in the Rose Garden
**
On
April 2, 2025, from the White House Rose Garden, President Donald
Trump announced the third era of American Tariffs. It was a
much-anticipated event, with the global financial world holding its
collective breath. Seemingly, no one knew the details of these new
taxes on imports.
Bloomberg reported that Trump and his
Cabinet worked out many of the details that morning. This starkly
contrasted with the Tariff Act of 1789, the first American Tariff,
when Congress debated for over a year before delivering that new law.
With Trump, the new tariffs were the result of an Executive Order,
not a law.
The Good Tariff
Imagine a proposed
bill written by Alexander Hamilton, the man most considered the
finest economics expert of his day and the Secretary of the Treasury.
It would be sponsored by an equally astute economics expert who would
later become President, James Madison. After much debate, it would be
signed into law by the most respected President of all time, George
Washington.
From the beginning of the debate over tariffs, it
was apparent that the country was divided into at least two
constituencies: one that welcomed and opposed tariffs. For the
factories of the North, tariffs would become the protection they
needed from foreign competition.
But for the farmers of the South,
tariffs were a costly burden. For years, the Southern States relied
on offsetting international trade. For instance, South Carolina sold
agricultural goods, chiefly tobacco, to Europe, providing finished
industrial goods to South Carolina.
It took months to
negotiate the necessary compromises. However, all the states reached
a final agreement, and George Washington signed the Tariff Act on
July 6, 1789.
The Act had three objectives:
First,
protect infant American Industry from foreign competition.
Second,
provide the funds needed to operate the new "Federal
Government."
Third, pay off the country's war
debt.
Objectives that still apply to our country 236 years
later.
Remarkably, it all worked, creating the financial
foundation of this infant nation. For well over a century, Tariffs
provided the revenue needed to operate the Government while servicing
the country's debt. As a bonus, they proved the protective barrier
that allowed for the development of American factories.
The
Bad
That all changed in the fateful year of 1913. Anyone
who has followed the debate over Trump's tariffs will hear this
discussion eerily similar. The Democrats, under President Woodrow
Wilson, argued that the existing Tariffs placed an unfair burden on
American consumers, who would pay higher prices on imported
goods—essentially the same argument we hear today.
Instead,
Wilson proposed an income tax on the "rich." After months
of debate and referendums in each of the States, the Sixteenth
Amendment to the US Constitution was passed. This Amendment
introduced the country to a new taxation: taxes on income.
Indeed,
initially, the income tax applied to merely the top 3% of income
earners. As you know, the Income Tax applies to most US citizens
today.
It also marked a sea change in the financing of the
Federal Government. Up until 1913, tariffs represented most of the
Government's income. After 1913, the Income Tax would become its
chief revenue source.
With this background, you can readily
see why the second great push for Tariffs was considered a failure.
Seventeen years after the country had turned away from Tariffs, the
Dust Bowl began. The Dust Bowl resulted from a tremendous drought in
the rich farmland of the Midwest. Following on the heels of the Stock
Market Crash of 1929, this provided a one-two punch to the nation
that resulted in the Great Depression.
In Washington, two
representatives recognized the suffering that the farmers were
experiencing. Senator Reed Smoot and Representative Willis C. Hawley
recalled the success that the early Tariffs had in protecting
American Industry during the nation's formative years.
Their Act was
designed to provide the same sort of protection for American Farmers.
On June 17, 1930, President Herbert Hoover signed the Smoot-Hawley
Tariff Act into Law.
While their effort may have been noble,
the American public did not see it that way. Like all tariffs, it
raised the cost of imported goods to consumers.
Because everyone was
suffering during the Depression, this new Tariff seemed like just one
more burden on an overburdened country. Economists decried the new
Tariff as extending the effects of the Depression, and the general
public rejected the tariff outright.
It took President
Franklin D. Roosevelt and the Democratic Congress of 1934 to pass the
Reciprocal Trade Act, which allowed the President to negotiate
Tariffs on a bilateral basis with other countries.
With the stroke of a pen, Roosevelt eliminated the higher Smoot-Hawley Tariff.
He
began a trend that was followed by almost all Presidents until Trump.
Roosevelt chose to appeal to the consumer rather than protect the
American producer.
The Unknown
Yesterday,
President Trump reversed nearly a century of moving away from
Tariffs, seeking instead to impose at least "nice"
reciprocal Tariffs across the globe. Many of the details have yet to
be worked out, as this is more of a developing Policy than a fully
enacted law.
Many questions remain over the ultimate success
or failure of these new Tariffs. However, we have two different historical models: the successful Tariffs of Hamilton and Madison in 1789 and the failure of the Smoot-Hawley Tariff of 1930.
The
current global integration of American Industry makes the future
outcome of tariffs uncertain. But one thing is certain: like every
Tariff, the cost to the consumer of foreign goods will rise.
So the
question becomes: Will the American public accept new, higher prices,
as we did in 1789? Or will we reject them, as we did in the
1930s?
The eventual success or failure of Trump's New Tariffs
lies with us, the American people. And perhaps that's as it should
be.
**
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