A Brief History of Strategic Tariffs in the U.S.

A May 29 article in the IMF’s F&D Magazine argues in favor of using U.S. tariffs as a policy tool. It begins by questioning the argument for free trade, claiming that economists have based U.S. and global trade policy on theoretical models rather than empirical evidence:

However, in the U.S. there is an extensive history of trying to use tariffs strategically, especially in the late 1800s through the mid-1900s. Douglas Irwin discusses this trend in his excellent 2017 book Clashing Over Commerce, and that book is where most of the information in this post comes from. During this period, global trade rapidly expanded as new technologies reduced transportation and communication costs. Like now, protectionism became in vogue and there were multiple attempts to “protect” American firms and workers from various foreign markets.

Protectionism, however, has always been a tough sell in American history. In a large country such as the United States, sectarian interests will dominate Congress and make it difficult to pass protectionist measures. While some were passed from time to time, they tended to be unpopular and fairly quickly repealed. 

In the late 1800s, the idea of reciprocal tariffs took hold in the political imagination. Much like today, the idea was simple: American firms are being “harmed” by foreign nations playing unfairly. So, if the U.S. government can pressure them using tariffs, they could lower their tariffs on us, supporting the U.S. export market. In 1890, Congress passed the McKinley Tariff Act, which created differential tariff rates on different nations. The McKinley Tariff Act also granted the president power to act as an agent of Congress in foreign tariff negotiations and threaten to raise tariffs if other nations did not lower theirs. This did lead to 10 agreements, mainly with Latin American nations. However, in 1892, Democrats took control of Congress and scrapped the McKinley Tariff Act in favor of universal tariff rates, effectively overruling those 10 deals. The countries who made those deals were outraged and jacked up their tariffs on U.S. goods.

A few years later, with the Republicans back in control, Congress passed the Dingley Tariff Act of 1897. Sections 3 and 4 of that Act again gave the president authority to threaten higher tariffs and to lower tariffs by up to 20% on certain goods if tariffs were reduced by other nations. 11 agreements were made under this authority, but the Senate ended up rejecting all of them.

In fact, according to Douglas Irwin, only three reciprocity treaties were successfully concluded between 1844 and 1909 (Clashing Over Commerce, table 6.4, p. 309). The rest were either rejected by the Senate or rejected by the other nation after changes demanded by the Senate were incorporated.

The first few decades of the 20th century saw a general drift toward trade liberalization, interrupted by World War 1. As the Great Depression began in 1930, protectionism once again reared its head, and the Smoot-Hawley Tariff Act kicked off a global trade war. Realizing this trade war was destructive and unsustainable, the nations of the world met in 1933 in London to try and walk back, but no agreement was forthcoming. In 1934, Congress passed the Reciprocal Trade Agreements Act (RTAA) of 1934, which gave the president vast powers to negotiate trade agreements. In short, the president could raise or lower tariffs by up to 50% of the Smoot-Hawley levels in exchange for tariff concessions from other nations. What’s important to note is the RTAA treated these as executive agreements, requiring only a simple majority of approval in the Senate rather than a 2/3rds majority. Furthermore, any reduction would be extended to any nation with which the US had Most Favored Nation status. Under the RTAA (and its extension), 19 agreements were reached between 1934 and 1939. By 1945, 32 agreements were signed. In just 11 years, the Roosevelt Administration had concluded over 10x the number of reciprocal trade deals than the century prior.

The RTAA would ultimately be replaced internationally by GATT and domestically by the Trade Expansion Act of 1962 and Trade Act of 1974. However, neither of these saw the success of the Reciprocal Trade Agreements Act in terms of strategic use of tariffs. Rather, the model of bilateral agreements proved far more effective at accomplishing negotiating goals. 

So, contrary to the claims made in F&D, the use of tariffs as a strategic tool has a long history with mixed success. In fact, I argue in a new working paper that the institutional structure of a government determines the success or failure of strategic tariffs. Where strategic tariffs were most successful was when the executive was bound to reduce tariffs and where approval from Congress required a simple majority. In situations where such a credible commitment to reduce tariffs was not present, the negotiations generally failed.

They broadly failed in the Untied States because of how our laws are set up. Tariffs are taxes, which fall under the exclusive purview of Congress (a point recently reiterated in Learning Resources v Trump), and thus require Congressional approval. And, when tariffs are used as part of treaty negotiations, then the Senate must approve any agreement with a 2/3rds vote (U.S. Constitution, Article 2, Section 2). With sectarian economic interests dominating Senate votes, getting that supermajority is extremely difficult. Those are intentionally high bars to clear. The genius of the Reciprocal Trade Agreements Act was for Congress to delegate just enough power so the president can be a credible negotiator (get over the 2/3rds barrier), but still bind him to his word by law (make these executive agreements that still require Congressional approval). Other reciprocal trade bills failed to accomplish this balance, either restricting the president too much (the McKinley and Dingley tariffs) or by giving him too much arbitrary authority (Trade Act of 1974). 

More broadly speaking, the conditions under which tariffs may be used strategically are very strict (see “The Economics of Section 301: A Game-Theoretic Guide” by John McMillan, in Economics and Politics 2(1), 1990). In short:

The nation being threatened must face significant harm if cut off from that market
The nation being threatened must not have the ability to retaliate significantly
The cost of complying must be small in the threatened nation
The threatening nation must perceive greater gains from liberalization rather than the threat

Those conditions are rare in the best of times, and probably considerably weaker as the world has gotten more globalized. Including in the institutional framework makes the successful use of strategic tariffs extremely difficult.