The key to using history to understand today — and to plan for the future — is recognizing what has remained constant when comparing different contexts.
What remains constant in trade policy is what is common in politics: policymakers pursuing short-term gains over longer-term national interest, and political leaders failing to learn from mistakes and correct course. In short: bad decisions.
The protective tariff policies of the 1920s and 1930s are excellent examples of this.
The United States had pursued a protectionist trade policy for much of the 19th century, but it was not until the Fordney-McCumber Tariff Act of 1922 that the U.S. experienced retaliation from trading partners in response to a tariff increase. This tariff set an average rate of 38.5% on imported goods and prompted an immediate negative reaction: France increased its tariffs on U.S. vehicles from 45% to 100%, Spain raised its tariffs on U.S. goods by 40%, and Germany and Italy targeted American wheat with higher tariffs.
The U.S. Congress that crafted the Fordney-McCumber Tariff had the same domestic concerns and desires to protect American industry and agriculture that previous protectionist Congresses had had in the 19th century. But American political leaders of the 1920s failed to recognize how the international political and economic context of the post-World War I era had changed.
In 1922, the U.S. was no longer a primarily agricultural country seeking to shield emerging, non-competitive “infant” industries from more advanced European competitors, or simply to raise tax revenue. Rather, the U.S. was now a leading industrial power and the largest creditor nation in a new world in which the “Great Powers” — particularly Great Britain and France — carried burdensome war debts, while Germany faced reparations it could only pay with American loans. Much of Europe had also suffered war damage to infrastructure and agriculture. For the U.S. to expect to raise tariffs by nearly 40% with no international reaction was unrealistic.
Despite the protests and retaliations that followed the Fordney-McCumber Tariff Act of 1922, U.S. policymakers continued to behave as if the world had not changed. Instead, they doubled down on protectionism with the Smoot-Hawley Tariff of 1930, which raised tariffs on more than 20,000 imported goods across both agriculture and manufacturing.
The international reaction to Smoot-Hawley was even stronger, more negative, and longer-lasting: retaliatory tariffs, boycotts, import quotas, exclusive trade blocs, and currency devaluation.
Even after the U.S. changed course in 1934 and began lowering tariffs, trade did not return to “normal.” Supply chains had shifted over the previous four years. Relationships and partnerships had changed. Protectionism had redefined the landscape. The context was now different.
The question remains whether political leaders will recognize this in crafting their trade policies today — and in the future.