Economic Fallout: 3 Past Tariff Wars

An opportunity to analyze Past Tariff Wars. The global economy currently faces its most significant trade shock since the notorious Smoot-Hawley tariffs of the 1930s. President Trump has implemented tariff on Chinese, Canada and Mexico goods which is fundamental shift in the international trade order that has prevailed for nearly a century. 

This development provides a timely opportunity to analyze historical tariff wars, extract data-driven insights, and identify critical lessons applicable to present circumstances. The stakes are considerable – the Tax Foundation estimates that Trump’s proposed tariffs could lower U.S. GDP by up to 0.65 percent and reduce employment by 370,000 full-time jobs. 

1. The Smoot-Hawley Tariff Act: The Great Past Tariff Wars

The Smoot-Hawley Tariff Act is famous for being a really bad example of using tariffs (taxes on things from other countries). President Hoover signed it in 1930. This law made taxes higher on over 20,000 things that were brought into the US from other countries. The tariffs went up by about 20%, making the average tax rate on these imports very high, somewhere between 40% and 60%.

These new tariffs were almost the highest the US had ever had, only being beat by tariffs way back in 1828. The goal of the law was to help American farmers and businesses by making things from other countries more expensive. This was supposed to protect them because the US economy was starting to have big problems and enter the Great Depression.

The law quickly had bad effects. Because of it, more than 25 countries put up their own tariffs to get back at the US. This made world trade drop a lot. We know from history that world trade went down by about 65-67% after these tariffs started. This huge drop in world trade made the Great Depression much, much worse, both in the US and other countries.

Experts who study the economy all agree that the Smoot-Hawley Tariff was a bad mistake. They think it changed a regular economic downturn into the really long and terrible Great Depression.

The numbers from this time really show how bad high tariffs can be for the economy. Because of these tariffs and other countries fighting back with their own tariffs, American buying and selling with other countries went down by 67% during the Great Depression.

The law was supposed to help American farmers and factories, but it actually hurt them. The prices farmers got for their crops went way down, factories made less stuff, and lots more people lost their jobs. Because people around the world weren’t buying as much, it created a cycle where the economy just kept getting worse everywhere.

It’s really interesting that even when the law was being made, over 1,000 economists told President Hoover not to sign it. They knew it could be really bad for the economy.

It was a very big deal that so many experts warned against this law. But sadly, Hoover didn’t listen. This shows that sometimes, even when all the experts agree on something, politicians might still do something different.

The bad results that followed proved they were right. The Smoot-Hawley Act is now a famous example of how tariffs can really backfire.

2. The 2018-2019 US-China Trade War: Recent Lessons

Think about the recent trade war between the US and China in 2018 and 2019. It gives us good information about how tariffs work now in the world. President Trump put taxes (tariffs) on about $350 billion worth of things the US buys from China. China then put taxes on about $100 billion of things the US sells to China.

This trade war was different from the Smoot-Hawley time because the economy was doing pretty well then and technology was much more advanced. So, it teaches us different things, but just as important.

Experts at the Tax Foundation looked at this and said that these tariffs made the US economy a little bit smaller in the long run – by about 0.2%. It also meant that businesses invested a little less money, and around 142,000 fewer people had full-time jobs.

Plus, because other countries put tariffs on US goods in return, it hurt the US economy even a bit more. This made the US economy and business investments shrink a tiny bit extra (less than 0.05%) and cost another 27,000 full-time jobs. These numbers show that even a small trade fight can cost the economy money and jobs.

Regular people buying things in the US ended up paying for most of these tariffs because prices went up. Basically, these tariffs were like a new tax on American families. Some studies say it was like an extra $300 to $600 in taxes for the average US family in 2023. This reminds us that tariffs are mostly paid by people and businesses in the country that puts the tariffs on, no matter who they are aimed at.

When there are trade wars, some parts of the economy win and some lose. For example, companies that make steel in the US might have done better because of these tariffs. But companies that use steel to make other things had to pay more for their steel. The Federal Reserve Bank did some research in 2018 that showed there are way more people working in jobs that use steel than in jobs that make steel – like 80 times more! This means that even if tariffs help some jobs in one area, they can hurt way more jobs in other areas because everything is connected.

3. Bush’s Steel Tariffs of 2002: Sectoral Protectionism

Let’s talk about when President Bush put a 30% tax on steel coming into the US in 2002. This is a good example of what happens when you put tariffs on just one type of product. He wanted to help American steel companies by making foreign steel more expensive.

But, the plan didn’t work out as expected. A group called CITAC said that because steel prices went up, companies in the US that use steel to make things (like car companies and factories) were hurt. They estimate that about 200,000 jobs were lost in these industries that use steel.

The timing was also bad. Unlike the US-China trade war which happened when the economy was doing well, Bush’s steel tariffs came when the economy was already a bit slow and still getting better after the dot-com bubble burst. This made things worse for the stock market. Stock markets around the world dropped a lot (about 26%) in the last part of 2002 because costs were going up, companies were making less profit, and people felt worried about the economy. Companies that sold steel to the US, like those in Japan and China, saw their stocks drop especially sharply because they were selling less steel and making less money.

Even though most stocks went down during this time, companies that were really strong and well-run didn’t drop as much. This shows that companies that are financially healthy can handle problems like trade issues better.

Also, other countries didn’t just accept the US steel tariffs. They put taxes on some things the US sells to them as a way to get back at the US. This meant the economic problems spread beyond just the steel industry. The World Trade Organization (WTO), which is like a referee for world trade, said that the US steel tariffs were against international trade rules. Because of this, the US had to remove the tariffs in December 2003. So, the tariffs didn’t last very long, but they still caused a lot of economic damage while they were in place.

Historical Perspective on Tariff Revenue and Economic Impact

In the past, taxes on imports (tariffs) were the main way the US government made money. Between the late 1700s and early 1900s, tariffs made up a huge part of all government income – sometimes as much as 50% to 90%!

But that’s very different today. Now, tariffs don’t bring in much money for the government compared to other sources. Usually, tariffs are less than 2% of the government’s total income. For example, in 2024, tariffs brought in $77 billion, but that was only about 1.57% of all the money the government took in. This shows that tariffs have changed from being a way to make money to being more of a tool for other government goals.

Think about the tariffs that were put in place or suggested by President Trump recently on goods from Mexico, China, and Canada. Experts at the Tax Foundation say these tariffs could bring in an extra $142 billion in tax money for the government in 2025. That sounds like a lot, but it would also be like an average tax increase of $1,072 for every family in the US.

And here’s the important part: even though these tariffs bring in money, they also hurt the economy overall. The same experts say these tariffs would make the US economy a bit smaller in the long run – by about 0.5%. This is because tariffs can make the economy less efficient. And if the economy gets smaller, then in the long run, the government might actually collect less total tax money because people are earning less and businesses are making less.

Most economic research says that when countries trade freely without tariffs, the economy grows and people earn more. But when there are tariffs and other trade barriers, the economy shrinks. History shows that tariffs make things more expensive and harder to get for businesses and regular people. This leads to lower income, fewer jobs, and a weaker economy.

That’s why over the last 100 years or so, most countries around the world have been reducing tariffs through agreements like GATT and WTO. They’ve realized that even though tariffs can bring in some money, they usually hurt the economy more than they help.

Lessons for Current and Future Trade Policy

Here’s what we’ve learned from past tariff fights, which is important for leaders and anyone interested in the economy:

1. Tariffs don’t just cause problems directly with trade; they also create uncertainty that hurts the economy.

Even just the threat of tariffs can be bad. Businesses get nervous and stop investing, and the stock market can get shaky. Think about the “almost trade war” with Canada and Mexico – even though the tariffs were stopped for now, the worry about them was still bad for the economy. Just the uncertainty around trade policy can act like a weight holding the economy back.

2. Tariffs hurt regular people and businesses that use imported goods more than they help the industries being protected

Think back to the steel tariffs: Yes, maybe some steel companies were helped, but way more people lost jobs in industries that use steel, like car factories. For every steel job that might be saved, there are many more jobs lost in other areas.

3. Smaller countries that depend on trade get hurt much more in trade wars than bigger countries.

If a small country like Canada or Mexico gets into a trade fight with a big country like the US, they have a lot more to lose. They might see their economies shrink much more than the bigger country. Some experts even worried that Trump’s tariffs could stop Canada’s economy from growing for years.

4. Strong, well-run companies are tougher and do better when there are trade problems.

When there’s trade trouble, companies that are financially healthy, make good profits, and aren’t in too much debt tend to handle it much better. Their stock prices don’t fall as much, and they recover faster. So, if you’re investing, it’s better to focus on strong companies that can weather any storm, including trade wars.

Conclusion

History clearly shows us that tariff wars are bad for the economy and don’t really give the benefits people hope for. From the really disastrous Smoot-Hawley tariffs way back when, to the more recent trade fight with China, the evidence is clear: tariffs slow down economic growth, cause job losses, make things more expensive for shoppers, and can even create problems between countries that can get worse.

The new tariffs started in 2025 by the Trump administration are the biggest trade shock we’ve seen since the Smoot-Hawley time. Tariffs are now at levels not seen since the 1940s. Experts think these new tariffs could make the US economy smaller and cost hundreds of thousands of jobs. And for countries that trade a lot with the US, like Canada and Mexico, it could be even worse or an opportunity to rethink their strategy so maybe consider moving to Mexico .

Yes, tariffs bring in some money for the government, but this is nothing compared to how much they hurt the overall economy. And it’s important to remember that trade fights can even lead to bigger problems, even wars, if countries can’t solve their disagreements peacefully.

So, what should leaders do? Instead of just putting up tariffs, they should talk to other countries and work together to solve trade issues. And for people investing or running businesses, it’s smart to focus on strong companies and not put all your eggs in one basket, because trade situations can be unpredictable. History teaches us that the best way to have a strong economy is to have open trade with other countries, and help workers and industries that are struggling in specific ways, rather than trying to protect everyone with tariffs that end up hurting everyone.

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