A tragic Trump tariff tale tweeted

"After failing to make trade deals, Trump is now just posting letters to world leaders announcing new tariff rates."

~ Meidas Touch

"Every one of the tariff letters ends by noting 'These Tariffs may be modified, upward or downward, depending on our relationship with your Country.' No American company is going to open a new factory based on the protection offered by a tariff [that] could disappear before the concrete sets."

~ Justin Wolfers

"They're not even letters. They're posts on the President's social media platform. .... So far: Japan 25% South Korea: 25% Malaysia: 25% Kazakhstan: 25% (very niiice) South Africa: 30% Laos: 40% Myanmar: 40% ... PLUS the sectoral tariffs"

~ Justin Wolfers

"Reminder: the US has a FREE TRADE AGREEMENT with South Korea, signed by the President (GWB) & implemented into LAW by Congress, and TRUMP HIMSELF signed a mini-deal w/ SK in 2018. Now ALL South Korean imports get a 25% tariff — for now. NO incentive for South Korea (or anyone else) to negotiate with him."

~ Scott Lincicome

"Unlike most of the countries Trump is shaking down with tariffs, South Korea has a free trade agreement with the U.S. (KORUS) that was ratified by Congress. The Constitution gives control of trade policy entirely to Congress, the president has no legal authority to do this."

~ Aaron Fritschner

"Trump punishes nice allies while he has not imposed any tariff on Russia or Belarus & no new sanctions either. Trump is transparently for our enemies & against our friends."

~ Anders Aslund

"[T]he logic is not just wrong - it’s economically backwards. Here's why:  

    "First, tariffs are not paid by foreign countries. A 40% tariff as an example goods means U.S. importers pay 40% more. Those importers pass the cost to consumers. Tariffs are taxes — and they hurt Americans, not the governments being 'punished.

    "Second, the letter treats the trade deficit as a threat. But a trade deficit isn’t inherently bad — it’s a reflection of dollar dominance. The U.S. dollar is the world’s reserve currency. Foreign nations want to hold dollars and invest in American assets — like U.S. Treasury bonds, real estate, and equities. This demand for dollars keeps the currency strong and allows Americans to buy more goods from abroad. That’s what creates a trade deficit — not weakness, but strength and global trust. So while countries exports goods to the U.S., the U.S. exports financial assets to the world. That’s not losing - that’s global balance.  

    "Third, the idea of retaliatory tariffs — 'if you raise yours, we’ll raise ours higher' — is not a strategy. It’s a threat that damages diplomacy, disrupts supply chains, and raises costs for American companies and consumers alike. Trade is not a zero-sum game. This kind of mercantilist thinking — where every deficit is seen as a loss and every surplus as a win — belongs in the 1700s. In a modern, interconnected global economy, it’s outdated and harmful. Bottom line:  

• Tariffs are taxes on Americans 
• Trade deficits reflect dollar strength, not weakness 
•  Retaliatory trade policy only hurts U.S. businesses 

"Economic nationalism may sound tough, but it’s American wallets that take the hit."

~ Jon Wiltshire

"Trump: What people don’t understand is... the country eats the tariff, the company eats the tariff and it’s not passed along at all… China is eating the tariffs. 

"Fact-check: False. Costs associated with tariffs are almost universally passed to consumers."

~ The Intellectualist

"Tariffs Aren’t Liberating": Your Tuesday Tariffs Ramble [UPDATED]

UPDATE: Some more great links here curated by Don Boudreaux, to help you put this calamity on context.

Since it's the topic of the day a historic turning point in human affairs, the least I can do is offer readers a ramble around the topic of tariffs and the destruction of tariff wars — basically, around the many writers reciting the multiplicity of ways in which the Trump Administration has fucked us.

"“Liberation Day”: That is what US President Donald Trump has called Wednesday, April 2, the day he announced huge swaths of taxes on imports worldwide. Despite the label, it was far from a day of liberation. By making imports to the US more expensive, the government is actively increasing the cost of living for American consumers.
    "The Trump administration has fallen for one of the most common misconceptions about trade—that it only benefits a country when it is the exporter. This could not be further from the truth. One of the greatest benefits of free trade lies with the importing country, where consumers gain access to a huge range of goods, crucially, at lower prices.
    "Whether it’s clothes, food, medical supplies, or mobile phones, access to the global market reduces the cost of living and increases consumer choice, often alleviating poverty in the process.
    "It comes down to a very simple principle. No one person could produce everything he or she consumes. No family or household could do so either. No city, town, or province could produce absolutely everything they consume. Equally, no country can produce everything it consumes, nor should it. Attempts to achieve autarky are acts of economic self-harm. Freedom to exchange across borders is win-win: it allows consumers to access a plethora of goods and services, improving welfare overall."

Tariffs Aren’t Liberating - Reem Ibrahim, FOUNDATION FOR ECONOMIC EDUCATION

"Tariffs are irrational both morally and practically.
    "Morally, tariffs are rights violations - they restrain or prohibit individuals from trading freely and voluntarily in their own self-interest with whomever - no matter where they reside geographically. ...
    "Practically, tariffs punish the individuals in the country which implements them. Trump even acknowledges the pain. But he mystically thinks this pain will be good and lead us to prosperity.
    "Tariffs raise prices, cause shortages, and decrease productivity. They destroy wealth, businesses, income, and jobs. This is well known in theory and practice. See the Smoot-Hawley Act and its role in making the Great Depression even worse.
    "Trump’s foreign policy is morally and practically irrational.
    "What is the moral and practical foreign policy solution?
    "Free trade."

          ~ Andy Clarkson

"The essence of capitalism's foreign policy is free trade—i.e., the abolition of trade barriers, of protective tariffs, of special privileges—the opening of the world's trade routes to free international exchange and competition among the private citizens of all countries dealing directly with one another."

The Roots of War - Ayn Rand, ARI CAMPUS

"Fundamental to the argument for high tariffs has been the argument that trade deficits reflect America being "exploited" or "taken advantage of." In this article of mine on, "Why Trade Deficits Don't Matter -- Unless Caused by Government," I explain the misguided economic reasoning behind this claim, and why the far better policy is free trade."
Trade Deficits Don’t Matter – Unless Caused by Government - Richard Ebeling, FUTURE OF FREEEDOM FOUNDATION

"Donald Trump is fond of saying that trade wars are easy to win. Among the litany of patently false Trumpisms, this may well prove one of the most disastrous. ...
    "Protective tariffs risk triggering a cycle of escalation that ends well for no one."

No One Wins a Trade War - William Bernstein, THE ATLANTIC

"America can’t be outcompeted because America does not produce or trade anything.
     "Nations do not compete with nations. Individual firms compete with individual firms abroad. Ford competes with Toyota. America does not compete with Japan. Nations are trading partners, not competitors."

Why America can't be outcompeted - Harry Binswanger, HARRY'S SUBSTACK

"“We are seeing a combination of true-believing mercantilism, shocking ignorance about how the global economy works, and shocking incompetence in the planning and execution of economic policy,” says Michael Strain."
Trump's aggressive push to roll back globalisation -FINANCIAL TIMES (paywall0

"Like the post-1945 British Labour governments, he wants to shelter domestic manufacturing and the working class behind tariffs while reducing overseas commitments. But the net result will be both economically damaging and geopolitically weakening. Americans will come to miss globalism and policing the world. They will belatedly realise that there is no portal through which the United States can return to the 1950s, much less the 1900s. And the principal beneficiary of Project Minecraft will not be Russia, but China. Call it Project Manchuria. ... 

"The president stands as much chance of reindustrialising the U.S. as you do of getting your frozen laptop to work by smashing the motherboard with a Minecraft hammer."

Trump’s Tariffs and the End of American Empire - Niall Ferguson, THE FREE PRESS

"So think of it as a world wide Brexit like the U.S. leaving the global economy.
    "A trade lawyer at a global law firm here in London told me their clients see Trump’s tariffs as “worse than Brexit” as they’re dealing with rapidly changing trade rules on a massive scale. It’s not just the tariffs that Trump has imposed, but the retaliation it will provoke."

‘How Ugly Is This Going to Be?’ - Graham Lanktree, POLITICO

"You will go to work in a hot, noisy, dirty factory for low wages. And you will like it. 

The quality of life your grandfather had is more than good enough for you!"

"It sounds so sensible: why not use protection and industrial policy to preserve manufacturing capacity “just in case” of, say, a war or a pandemic? And, to be sure, this is a better argument for some limited government intervention on trade and investment flows than wanting to tax imported bananas or revive manufacturing.
    "But even then it’s not the slam dunk some people imagine. Below is my chapter on this issue from Economics In One Virus, published in 2021. It’s just as true and relevant today."

Flaws in the "Just In Case," Self-Sufficiency Case for Protectionism - Ryan Bourne, WAR ON PRICES

"The populist story of the death of U.S. manufacturing is nonsense. Mr. Vance and his cohort maintain that increased free trade with countries such as China in 2000 or Mexico in 1994 killed American jobs. It’s true that the number of manufacturing jobs is lower than it was in 1970. But that’s because we can make so much more with fewer people. Blame technology, not trade.
    "Real hourly output per manufacturing employee has been on an upward trend since 1959. Real U.S. manufacturing value-added—the sector’s contribution to gross domestic product—reached its highest recorded level in 2022. Manufacturing output was close to its all-time high in 2022, and the U.S. remained the global leader in manufacturing value-added per worker.
    "Steel is one example. In 1980, one steelworker could produce 0.083 tons of steel in one hour. By 2018, one steelworker could produce 1.67 tons in an hour. This is a good thing. Wage and income data in the U.S. show the rising tide is lifting all boats—especially the smallest.
    "Americans don’t want their children to have to work punishing jobs in a steel mill, and it’s evident they don’t have to. Manufacturing jobs, as a share of total employment, have been on a downward trend since 1943—falling from 39% to under 25% by the end of 1970 and hitting 20% in 1980. This decline started long before Ronald Reagan ran for office, before China received Most Favored Nation status for outsourcing manufacturing, before Bill Clinton signed the North American Free Trade Agreement and before the World Trade Organization was created. The trends even started five years before the U.S. joined the General Agreement on Tariffs and Trade."
Free Trade Didn’t Kill the Middle Class - Norbert J. Michel, WALL STREET JOURNAL

“The philosophy of protectionism is a philosophy of war.”
          ~ Ludwig von Mises

"“When it comes to steel, it’s fantastic for our industry,” said Jack Maskil [president of the United Steelworkers Local 2227 in Pittsburgh’s Mon Valley], “but what about everything else?” ...

    "On the one hand, they are thrilled that their industry will be a key beneficiary of the 25 percent tariff imposed on steel imports to the U.S. ...
    "But while the steelworkers are also hoping that tariffs will bring about a revival of manufacturing jobs, they also worry about their effect on the economy, and on their own purchasing power."

What Do American Steelworkers Think About Trump’s Tariffs? - Ethan Dodd, THE FREE PRESS

"President Trump’s ‘Liberation Day’ tariffs risk domino effect across the globe as Chinese goods look for new markets."

The Rest of the World Is Bracing for a Flood of Cheap Chinese Goods - WALL STREET JOURNAL

"The proponents of protectionism say, “Free trade is fine in theory but it must be reciprocal. We cannot open our markets to foreign products if foreigners close their markets to us.” China, they argue, to use their favorite whipping boy, “keeps her vast internal market for the private domain of Chinese industry but then pushes her products into the U.S. market and complains when we try to prevent this unfair tactic.”
    "The argument sounds reasonable. It is, in fact, utter nonsense. Exports are the cost of trade, imports the return from trade, not the other way around."

In 1970, Milton Friedman Advocating Moving Unilaterally Toward Free Trade Rather Than Retaliating. We Still Haven’t Learned That Simple Lesson -Mark Perry, AEI

"This idea that Donald Trump is just playing hardball to negotiate tariff rates down on US exports is absolutely ridiculous. The % of tariffs applied to US-produced goods has declined consistently since WW2 and was nearly nothing...
    "UNTIL! Donald's first term, and now his second.
    "And yet I keep seeing so many MAGA supporters saying: 'We're already seeing countries backing down from their tariffs!'
    "You're literally winning a battle and losing the war at the same time ..."

~  Landon Walsh

"Then there’s Trump’s fascination with tariffs. The damage Trump has caused Ukraine and Nato pales by comparison to what his tariffs will do to America’s economy and the entire international economic system. If Trump had acted on April 1 instead of 2, he could quickly have said it was all an April Fool’s Day joke, thereby saving the global economy trillions of dollars of damage when markets started heading south. Unfortunately however, Trump is totally serious, a fact evident long before “Liberation Day.”
    "Here too, “experts” and anxious businesspeople steadfastly ignored Trump labelling “tariff” the dictionary’s most beautiful word. Tariffs, they said, will be targeted, carefully calibrated, and he’ll do deals quickly. It’s all a bargaining tactic, Treasury Secretary Bessent said in October, 2024: “escalate to de-escalate”. Even as global stock markets drop like rocks, experts are still rationalising what his “strategy” is.
    "Wrong again. Trump is more likely to win the Nobel Prize for literature than for peace."

I worked for Donald Trump. This is the key to understanding him: It’s not about America, and there’s no connection to the real world - John Bolton, TELEGRAPH (UK)

"Reminder: This policy was spearheaded and implemented by a man who thinks nobody says the word “groceries” these days because “it’s an old-fashioned word” and he somehow brought it back into the limelight.
    "Donald Trump is a motherfucking moron. Those who knew this and voted for him anyway because he gave them explicit license to be assholes deserve every last bit of pain his policies will cause them."

          ~ Stephen T. Stone

"In times of upheaval, those closest to power often find ways to turn disruption into wealth. Trump’s erratic tariff wars, billed as economic nationalism, upended markets, collapsed sectors, and triggered retaliatory shocks. But while farmers went bankrupt and consumers paid more, the market opened space for those with foresight—or insider access—to buy low and consolidate.
    "Geographer David Harvey calls this accumulation by dispossession: crisis used not to correct the system, but to extract from it. Devalue public assets. Destabilise protections. Create just enough chaos to buy cheap what others are forced to abandon. It’s not just policy failure—it’s extraction dressed as populism.
    "The con isn’t just psychological. It’s material. It’s not just about being lied to—it’s about being looted.
    "And that’s what makes this moment different—and more dangerous. The scam isn’t happening outside the system. It’s running through it."

The Confidence Game: How Trump’s Con Threatens More Than the Truth - James Greenberg, JAMES'S SUBSTACK

"The latest rumor, when I started drafting this column, was that President Trump will suspend the tariffs for a 90-day period, with the exception of those on China. Markets started going back up again.
    "But “the very latest information” doesn’t stay current for long these days. The new report—but don’t count on it—is that the 90-day pause is not real after all. That revision came out before this draft was finished. And markets again whipsawed.
    "The Trump administration has created a new monster—one of unpredictability and erratic behavior. We simply cannot predict with any degree of accuracy what will happen next. By the time you are reading this article, there will probably be some newer report about the tariffs or threat of tariffs, and then another report after that.
    "Even if the White House winds up instituting a pause on the proposed tariffs—or ultimately adopts much better economic policies—this seesawing may plunge the American and perhaps also the global economy into recession."

A Contagion of Uncertainty - Tyler Cowen, THE FREE PRESS

[WATCH] Singapore must be clear-eyed about dangers ahead: Singapore's Prime Minister Wong on implications of US tariffs:

"Donald Trump has demonstrated his profound misunderstanding of the basic economic principles of international trade for several years now, and perhaps reached a pinnacle when he told the New York Daily News in an interview last August that “we’re getting hosed by the Chinese — and that we’ve done it with our eyes wide shut.” ...
    "[Trump adviser] Peter Navarro, in his Wall Street Journal opinion piece earlier this week (see related post here) demonstrated his fundamental misunderstanding of international trade when he opened his op-ed with the following question: “Do trade deficits matter?” Just to ask the question is to admit one’s ignorance of trade theory, which has been pretty settled on this topic since Adam Smith taught us in 1776 that “Nothing…can be more absurd than this whole doctrine of the balance of trade. ..."

Trade Deficits Don’t Matter; Understanding Deficits Do: Protectionists' idea of a trade balance is completely backward -Mark Perry, FOUNDATION FOR ECONOMIC EDUCATION

Tariffs are a suicide bomb":

Trump's team said they based their "reciprocal tariff" calculation for each country based on the tariffs and impediments put on American imports by those countries. But no. It's even more irrational: "[Trump's chart] features an estimate of 'Tariffs Charged to the USA' by other countries that nobody could figure out, until a financial journalist realised it was just how much we export to that country, minus how much we import, divided by how much we import."

"Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by regarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and binds together by one common tie of interest and intercourse, the universal society of nations throughout the civilised world."
        ~ David Ricardo (1817)

"Why is today’s Trump so different from the Trump of his first term? .. ". Turns out, the answer is very simple" Back then he had people, and a Congress who would say "No." But now the yes men are in power.

What happened to Trump? Why has be become so pro-Russian? - Roman Sheremata, UKRAINE TODAY

Trump's tariffs policy came from his economic advisor Peter Navarro, who invented a fake expert in his books to justify it. "Peter Navarro liked to quote a guy named Ron Vara in his books. Those books are largely what led to Navarro becoming a top adviser to President Trump and helping to shape U.S. policy on China. Here’s the thing about Ron Vara, though: He doesn’t exist. ...

"Ron Vara is an anagram of Navarro."

Trump's China Muse Has an Imaginary Friend - Tom Bartlett, CHRONICLE OF HIGHER EDUCATION

 

Second-term Trump is who Trump always was. This is Trump without many adults in the room stopping him getting his way. This is Trump surronded by Yes Men in a cult. This is Trump. A freedom-hating, dictator-loving, trade-despising child who wants the power of a tryant. Someone who has no regard for facts and who will utter any lie he wishes - no matter how ridicolous it is. And his believers are expected to believe it. Under fear of discommunication from the cult.
This is what you asked for when you voted for Trump. This is what you got. I hope you are happy....

          ~ Dwayne Davies

"An often forgotten truth is that it is not just military warfare that can cause injury to innocent bystanders, the same inescapably happens in economic warfare initiated by governments, as well. But in the latter case the human “collateral damage” is a targetted victim. ...
    "Tariffs and counter-tariffs are tools of economic warfare that are said to be targeting the “aggressor” country. But the very nature of how tariffs and counter-tariffs work, results in the main targets being innocent bystanders in the countries concerned.
    "Once we disaggregate “nations” into their, respective, individual buyers and sellers, producers and consumers, we see that the most damage falls on the economic “non-combatants,” of whatever the original “dispute” may be about ..."

Trump’s Economic Warfare Targets Innocent Bystanders - Richard Ebeling, FUTURE OF FREEDOM FOUNDATION

"TikTok is a major bargaining chip in a grave geopolitical struggle. Given the data users have always sent to Beijing, it’s been a bargaining chip ever since it arrived on America’s digital shores. For Trump, though, it’s not exactly his chip to bargain with: Congress already determined the American course of action. The mystery is why nobody seems to mind Trump delaying its execution — or at least, why nobody is complaining publicly....

    "Trump’s motives here are not difficult to parse, and the bill in question is legitimately problematic. He’s popular on TikTok, and close to one of the company’s major investors. ...
    "As fallout continued from his tariff bombshell — including the legitimacy of his emergency authority to implement the new rates — barely anyone batted an eye at TikTok getting another dubious bailout."

Why Trump keeps saving TikTok - Emily Jashinsky, UNHERD

"Since my last essay on the crisis of democracy, the assaults on democratic checks and balances have escalated. Without agreement from Congress, Trump’s DOGE shut down the U.S. Agency for International Development with stunning speed. Although a federal court blocked further implementation, ruling that the action “likely violated the Constitution,” by then the agency had already been gutted and largely dismantled along with many other agenices. Then, in an alarming politicisation of the military high command, Trump fired the Chairman of the Joint Chiefs of Staff, the Chief of Naval Operations, the Air Force Vice Chief of Staff, and the judge advocates general (the highest-ranking legal authorities) for the Army, Navy, and Air Force.
    "Pressing his claim to imperial power, Trump has moved to assert absolute control over all federal regulatory bodies, including the Securities and Exchange Commission, the Federal Trade Commission, and the Federal Communications Commission. This not only hobbles their capacity to act independently in the public interest but opens the door to massive corruption. As DOGE seizes control of more and more of the government’s most sensitive and highly centralised stores of data, the conflicts of interest proliferate for its chief 'overseer,' Elon Musk, who over the years has received 'at least $38 billion in government contracts, loans, subsidies and tax credits.' And Just Security has documented an 'alarming' pattern of 'politicisation and weaponisation of the Department of Justice since Trump has retaken office.
    "The United States now faces the grave and imminent danger of its democracy decaying into a 'competitive authoritarianism'.”

How to Undo Trump’s Growing Dictatorship and the Damage it Is Inflicting - Larry Diamond, THE UNPOPULIST

"We have to realise that Trump is not joking about any of this. He’s not joking about invading Greenland, and he’s not joking about running for a third term. He’s as serious about all of this as he was about the tariffs. The evidence indicates that he will do it all, whatever he can get away with. ...
"While we prepare a mass movement—and Donald Trump crashing the economy with the world’s stupidest tariffs will help us a great deal—we need to fight everything. What that will specifically mean is that we have to fight a lot of losing battles. ...
"There are five reasons to fight early and often, no matter the odds of winning any one fight.
    1. It lays down a marker. ....
    2. It mobilises others to fight. ....
    3. It delays and exhausts the strongman. ...
    4. Sometimes you win. ...
    5. You find out what works and who fights. ...."

How to Fight Back - Robert Tracinski, TRACINSKI LETTER

'China's Trade Surpluses are Not a Source of Strength'

“'China believes it has a mandate to rule the world,' and that it is using trade balances to accomplish this. ... But, ultimately, Chinese trade surpluses [don’t] help ... '[Right up to] 1839 ... trade favoured the Chinese.' Little good it did them: China [eventually] experienced military humiliation, political and social disintegration, and an eventual descent into communism. ...
   "China’s 'strategy of generating massive trade surpluses [would] not have worked [when money was] backed by bullion ... the trade surpluses incurred by exporting more than its imports [would] have caused China’s currency to appreciate ... [making] Chinese manufactures more expensive and less attractive for outsourcing…'
   "'That never happened' ... because [without a gold standard] China [could devalue] its currency, harming its own people...' .... China’s currency manipulations have imposed costs on its citizens in terms of reduced real incomes. 

   "That isn’t all. The currency creation necessary to keep the yuan’s exchange rate with the dollar somewhat stable when new dollars are being produced at an impressive rate has helped fuel one of the biggest property bubbles in history [in both China and the US] .... [A] US deficit on the trade account must be offset with a surplus on the capital account ... [so] to maintain its export advantage was devious: it invested in the United States, 'buying US assets with US dollars ...The CCP today sits atop a $3 trillion hoard of assets, many of them American.' 

    "And, again, little good it did them. Holding significant stocks of depreciating US government debt isn’t, in fact, a source of strength. China cannot dump them to drive Federal borrowing costs up without tanking their value, which the Federal government is doing itself. As for those US assets, like farmland, it isn’t going anywhere, just like the buildings bought to much distress by the Japanese in the 1980s.
   "China’s government might well be running a trade surplus as a matter of policy. It may even be doing so with the aim of strengthening itself relative to geopolitical rivals like the United States. But ... it has tried this before [and] that same history indicates that the prospects for the government in Beijing are not good. Little good it did the Qing dynasty and little good will it do the Communist Party....

   "As Adam Smith observed in 'The Wealth of Nations,' mercantilism can enrich a few individuals but not entire countries – it detracts from, rather than adding to, the general welfare."

~ Composite quote from John Phelan, Kevin Roberts and Richard Fulmer from the post 'China's Trade Surpluses are Not a Source of Strength'

Henry Clay’s “American System” Was Bad News for the American Economy *Then*, and Will Be Again [updated]

 

GUEST POST

This bizarre protectionist manifesto (above) was posted and now appears to have been scrubbed from the Daily Caller's website. No wonder.

The author—a former Senior Policy Advisor to JD Vance in the Senate—has recently been appointed as Trump's "Special Assistant for Domestic Policy." An archived link of his article gives a glimpse of what this "Special Assistant" and his bosses believe. In short, as Phil Magness and James Harrigan explain in this guest post, it's outright Neo-LaRouchie lunacy rooted in the mercantilist economic doctrines of 19th century arch-protectionist Henry Clay—and "American System" whose modern rehabilitators conveniently leave out the fact that every time it was tried in the 19th and early 20th centuries, Clay’s program unleashed a torrent of preventable policy disasters.”

In other words, it's protectionist junk all the way down that will lift no-one anywhere ....

Henry Clay’s “American System” Was Bad News for the American Economy Then, and Will Be Again

by Phil Magness & James Harrigan

Some ideas are so bad we are doomed to relive them with each successive generation. Until recently, economic central planning from the political right received far less attention than its well-known manifestations on the left. Think of all the repeated attempts to rehabilitate Marxism and socialism, despite their disastrous track record over the last century. Unfortunately, an emerging faction on the political right has decided to deploy economic planning of their own as an intended countermeasure against their progressive foes. For inspiration, they’ve resurrected a failed and long-forgotten idea from the 19th century: Henry Clay’s “American System.”

Clay’s program was first articulated in an 1824 speech, in which he proposed using the Constitution’s tax and regulatory powers to execute America’s first national foray into centralised economic planning. His basic idea was to enlist the might of the federal government to strategically develop certain sectors of the American economy by subsidising them with tax dollars, and penalizing their foreign competitors with high protective tariffs.

Clay maintained that import tariffs could be used to give American manufacturers a leg up over European goods, while also cultivating “infant industries” that he deemed to be in the young nation’s strategic interests. Topping off the package, Clay proposed a spending spree on federally subsidised “internal improvements,” such as roads and canals to facilitate internal commerce, and a strong central bank to facilitate the financing of large government programs through the issuance of sovereign debt. In total, the program amounted to a comprehensive attempt at economic planning around the mistaken belief that trade is a zero-sum game, and countries were locked in a continuous struggle to maximise their industrial outputs by subsidising themselves and taxing their perceived foreign competitors.

If all of this sounds vaguely familiar, it should. It’s part of the protectionist-tariff playbook we witnessed during the Trump presidency. Or maybe it’s better seen, as William Galston asserts, as representing “an effort to bring some ideological coherence to the impulses Donald Trump represents—nationalism, isolationism, social conservatism, and hostility to immigration.” Indeed, Robert Lighthizer, the former Trump cabinet official who is considered the architect of his international trade policy, recently called for the adoption of a “New American System” based on Clay’s 1824 proposal at a speech in Washington, D.C. Henry Clay’s scheme similarly assumed centre stage at a National Conservatism Conference in Miami, Florida, when historian Michael Lind depicted him as the true successor to the American founding, by way of Alexander Hamilton. Clay’s ideas have also found an institutional home at the American Compass, a think tank set up by Oren Cass, Mitt Romney’s former economic advisor. 

It would be difficult to overstate the rapid pace at which Clay’s ideas have surged out of obscurity and into political discussions on the right. Barely two decades ago, discussions of it were almost entirely relegated to the peripheral fringes of American politics. Today, Secretary of State Marco Rubio invokes Clay as a model for constructing a US industrial policy to counter the economic rise of China.

The fundamental problem with this line of reasoning is that it rests on bad economic history, overlaid with the logical fallacy post hoc ergo propter hoc.

The “new American System” advocates tell a version of US economic history that goes something like this: 

• In the early 19th century, the United States entered the world scene as an economic backwater facing insurmountable competition from the established industrial nations of Europe, and particularly Great Britain. 
• By the turn of the twentieth century, the United States had emerged as one of the world’s great industrial powers, even surpassing the Old World despite getting a later start. 
• The credit for this growth, they claim, goes to the “American System” policies that Clay championed: high protective tariffs, subsidized “internal improvements,” the gradual expansion of a powerful central bank, and all around economic planning.

Even the basic claims of this story are in error. however. As economist Douglas Irwin has shown, proponents of the theory that tariffs drove American economic growth “have tended to present statistics that overstate late nineteenth century US growth in comparison to other periods and countries.” After examining the empirical evidence, Irwin concludes, 

It is difficult to attribute much of a positive role for the tariff because import tariffs probably raised the price of imported capital goods, thereby discouraging capital accumulation.

He accordingly rules out the theory that trade protection, the main plank of Clay’s platform, caused the United States to become a world economic power.

But there are even-more-fundamental problems with the new “American System” theorists’ history. They get basic facts wrong about the nature of 19th century economic policy, while simultaneously obscuring or ignoring the many downsides of Clay’s program and its attempted implementation.

The Rise and Demise of the American System

Though once a popular political slogan, Clay’s American System fell into disrepute after a series of discrediting blows in the 19th and early 20th centuries. The first came in 1832, when President Andrew Jackson vetoed legislation to recharter the United States’ corruption-plagued central bank. The creation of the Federal Reserve in 1913 resuscitated this legacy, along with its tendency to engage in political manipulation of monetary policy, though the Bank War did manage to constrain the push for centralisation on that front for much of the 19th century.

Clay’s original tariff program endured a bit longer, finding legislative support at various points between 1824 and 1930. As the chart below shows, however, the 19th century was not an uninterrupted experiment in Clay-style protectionism. Clay only briefly got his way when a series of tariff measures between 1824 and 1828 jacked the average rate on dutiable goods to over 60 percent. The “Tariff of Abominations,” as the 1828 measure came to be known, sparked a political crisis that brought the country to the brink of disunion, after South Carolina attempted to nullify the high tax measure. As the graph shows, from 1833 until the Civil War, the United States charted a course of tariff liberalization, save for a brief interruption when Clay’s Whig Party attained power in 1842. In fact, in 1846 US Treasury Secretary Robert Walker orchestrated a major tariff liberalization to coincide with Great Britain’s famous repeal of the protectionist Corn Laws that same year.

The United States did not reimpose high tariffs in the Clay model with any degree of permanence until the second half of the nineteenth century. While this period did coincide with economic growth, the claim of a causal relationship ignores the fact that the American economic ascendance was already well underway, preceding those tariffs by several decades, and getting its start in a time of relative trade liberalisation on both sides of the Atlantic.

One of the main reasons Henry Clay struggled to get his American System launched in his own lifetime (1777-1852) was the political corruption it always attracted. In practice, the American System’s rationalization of trade protectionism provided cover for rampant graft and favoritism. From the moment of its inception, politically connected special interests seized control of federal tariff legislation and reshaped it to their own benefit. They lobbied for punitive tax rates on their competitors and pork-laden handouts for themselves, even if it meant overtaxing commerce at the expense of revenue itself. At several points in the 19th century, protectionist tariffs pushed the US tax system into the upper half of the Laffer Curve, where rates became so onerous that they undermined the intake of federal tax revenue. This was by design, as protectionist tariffs use taxes as a weapon to deter foreign goods from even entering the country.

The American System and Slavery

Clay’s American System also struggled to disentangle its doctrines from the institution of slavery. Its underlying theory held that the American economy could be “harmonised” and internally integrated through national economic planning. That meant deploying “internal improvements” and the tariff schedule to bind northern industry and southern agriculture together in economic symbiosis. Clay’s doctrines amounted to an early experiment in import substitution: the strategy of using tariffs and other commercial restrictions to divert raw-material production away from international markets and into a heavily subsidised domestic industry. In practice, this meant intentionally shifting southern cotton production away from transatlantic markets and into the textile mills of New England. In order for the American System to function as intended, it would have to subsidise plantation agriculture as well as northern industry.

Some of the American System’s proponents, including Clay himself, eventually recognized that a full “harmonisation” of the US economy under the American System would entail significant public expenditures to develop southern agriculture, thereby politically entrenching slavery in perpetuity. Clay (who, despite being a slave-owner, had reservations about the institution) therefore devised what is often referred to as the “Whig formula” for addressing slavery through a scheme of federally compensated gradual emancipation.

To facilitate this program, Clay appended the American System doctrine with another plank. In addition to paying for “internal improvements,” federal land sale revenue would be allocated to “colonise” or resettle the African-American population of the United States in faraway tropical locations such as Liberia or Central America. As Clay explained in an 1847 speech, federally subsidised colonisation “obviated one of the greatest objections which was made to gradual emancipation,” that being the “continuance of the emancipated slaves among us.” Following Clay, American System theorists such as economists Mathew Carey and his son Henry C. Carey began to champion the black colonisation movement as a “solution” to the problems that slavery presented to their tariff and subsidy scheme. In order to make the system work without plantation slavery, they would simply export the freed slaves abroad.

Aside from a few experiments such as the founding of Liberia, such schemes proved impractical, and eventually succumbed to political obstacles during the American Civil War. Clay’s tariff system nonetheless gained a foothold on the eve of the war, as protectionist interests exploited the chaotic “secession winter” legislative session of 1860-61 to cram the pork-laden Morrill Tariff Act through Congress—dramatically hiking tariffs from (declining) average rate of below twenty percent, to a suffocating imposition of almost fifty percent!

A Civil War Diplomatic Disaster

Although the 1861Morrill Tariff succeeded in finally installing an American-System-style tariff regime for the next half-century, it quickly turned into a diplomatic disaster. The new law’s steep protectionist rates alienated the British government, which would otherwise have been a natural anti-slavery ally to the Union cause. At the outbreak of the war, British abolitionist and free-trader Richard Cobden wrote his friend Charles Sumner, the US Senator from Massachusetts, to plead the importance of free trade to the anti-slavery cause. “In your case we observe a mighty quarrel: on one side protectionists, on the other slave-owners.” Citing the Morrill Tariff supporters’ publicly expressed reluctance to move against slavery, Cobden predicted the measure would imperil his efforts to steer Britain to the aid of the North. As he rhetorically asked his fellow abolitionist Sumner, “Need you wonder at the confusion in John Bull’s poor head?”

As part of the fallout, the Lincoln administration entered the White House facing an irate diplomatic landscape. In part alienated by the tariff, Britain adopted a stance of neutrality toward the two American belligerents. After successive missteps further soured the Lincoln Administration’s relationship with London, abolitionists such as Cobden had to mobilise opinion on the British homefront against the Confederacy by reminding people of slavery’s central role in the war. The diplomatic row, which began with an ill-conceived and opportunistic tariff bill on the eve of Lincoln’s inauguration, would plague US-UK relations for decades to come. Its wartime effect thrust the incoming administration into a needlessly hostile diplomatic situation, handicapping the Union’s war efforts from abroad.

As a domestic economic policy, the Morrill Tariff served a slew of special interests in the northeast by placing punitive taxes on their competitors. It did not finance the Union war effort (as is often incorrectly claimed by American System enthusiasts) as it was never intended for the purpose of raising revenue. The Morrill Tariff primarily aimed to deter commerce from abroad at the behest of domestic manufacturing, allowing them to capture increased prices on their own goods. As a war measure, it amounted to a self-inflicted wound by alienating Britain from the Union’s cause.

How Clay’s Tariffs Gave Us the Income Tax

After the Civil War, the tariff issue came to dominate American economic policy. Until 1909, the successors to Clay’s “American System” generally enjoyed the upper hand. That year, President William Howard Taft called for a routine revision to the federal tariff schedule that quickly devolved into a corrupt free-for-all of tariff favoritism and special-interest handouts.

Amidst the backlash against the Payne-Aldrich Tariff Act’s special-interest free-for-all, a coalition of free trade Democrats and breakaway Republican “insurgents” in the US Senate turned to a radical solution. Realising that they would never break the monied interests of the protectionist lobby, they proposed restructuring the entire federal tax system by shifting it away from the corruption-prone tariff schedule. The result was the 16th Amendment, a flanking move that tried to substitute the protective tariff system with the federal income tax. The amendment, one legislator boasted at the time, would serve as a “club to beat down the tariff” by separating the federal tax system from the entrenched protectionist lobby.

For a fleeting moment, the strategy worked. In 1913, Congress cut import tariffs to their lowest point since the 1850s, and imposed a modest income tax to make up for the loss of revenue. The special-interest groups quickly reconstituted though, and in 1922 they succeeded in exploiting an economic downturn in the agriculture sector to make the case for renewed protectionism. Since the income tax already provided the lion’s share of tax revenue, lawmakers no longer had to worry themselves about jacking up tariff rates to prohibitive levels. As a result of this post-World War I resurrection of Clay’s “American System,” the United States ended up with the worst of both worlds: high tariffs to raise the prices on imported goods at the behest of their domestic competitors, and a new federal income tax to extract revenue from them at every opportunity.

When Americans complete their income tax filings today, few realise that the interminable frustrations of this annual ritual have their origins in a now-obscure tariff bill. It was the corrupt overreach of Clay’s “American System,” though, that ultimately bequeathed us with the modern IRS.

Smoot-Hawley and the Collapse of Clay’s Doctrine

The legislative progeny of Henry Clay’s doctrines finally came to a catastrophic head in 1930 when Congress enacted the Smoot-Hawley Tariff. The measure passed in a desperate attempt to shield special interests from the 1929 stock market crash, although its legislative origin predated “Black Monday” – October 28, 1929 – by several months. The congressional record shows that Smoot-Hawley took its direct inspiration from Clay’s doctrines. The debate on the bill commenced in the House of Representatives earlier that May. Making the case for the protectionist side, Rep. Hamilton Fish (R-NY) declared that “the Republican Party has just one viewpoint, and that is to protect American labour and American industry, not through a competitive tariff but through a tariff that actually protects.” To reinforce his point, Fish quoted “a brief extract from a speech of Henry Clay in favor of a protective tariff…which has never been improved on and has constituted the Republican tariff doctrine for the past 70 years.” After quoting Clay’s American System speech from 1824, Fish offered his rationale for adopting a renewed protectionist policy in 1929. It reads like a talking point from Oren Cass’s American Compass today:

The prosperity of this Nation [claimed Fish] has been built up because the Republican Party has hewed to the line to protect American labor and American industry and to conserve the home markets from ruinous competition with the low-paid labour in foreign countries.;

In a prescient response, another representative challenged Fish by warning that a tariff hike could lead to economic turmoil, including triggering a harmful turn in already-uneasy unemployment numbers. If the tariff passed, was Fish ready to take “credit for the general condition of unemployment that now exists in the United States?” After dissembling over particular, contested tariff rates and the need to serve a multitude of special interest constituencies, Fish reiterated the philosophical justification for pushing ahead. He again invoked Henry Clay’s American System:

That principle was laid down by Henry Clay—the principle of protecting the home market. It is just the reverse of the English attitude. They export 90 percent and only absorb 10 percent of their products in their own home market: We consume in this country 90 percent of our home product and export 10 percent. The question is simply whether you prefer to conserve the home market and protect American wage earners or let the products of low-paid foreign labour destroy the home market for the American producer.

The stock market crash in October poured gasoline onto an already-burning fire as the Smoot-Hawley bill progressed through Congress. The pork-barrel free-for-all saw money changing hands between lobbyists and legislators on the floor of the committee rooms, as industry after industry attempted to purchase “protection” for itself from the unfolding economic recession. They thought they were weathering the storm by obtaining legislative favors. Instead, the cumulative hikes of Smoot-Hawley boosted tariff rates to a historic high of almost 60 percent on all dutiable goods entering the United States. The measure provoked a wave of retaliatory protectionism across the world. In just four short years, Smoot-Hawley had inadvertently triggered a global collapse in international commerce.

The effects may be seen in the famous “spiral” graph published by the League of Nations’ World Economic Survey in 1933. By pursuing the course advised under the “American System” doctrine, the United States directly helped to put the “Great” in “Great Depression.”

Repeating Old Mistakes

The National Conservative argument for the “American System” correctly observes that there were moments in United States history when the country largely adhered to Henry Clay’s suite of high protectionist tariffs, public works projects, and allegedly "strategic" industrial subsidies. They also choose to deemphasise, or may even remain ignorant of, the American System’s more ignominious legacies. You will seldom encounter, for example, a NatCon who seriously engages with the moral conundrum that slavery created for Clay’s import-substitution scheme before the Civil War. The American System’s colonisation plank is almost entirely absent from these discussions, and its propensity for attracting graft and corruption in its later iterations is almost always swept under the rug.

Instead, the version they present is an idealised form of seamlessly executed economic planning, albeit for “strategic” purposes in the “national interest” instead of the left’s usual litany of social justice causes. The inherent coordination problems of centralised economic planning do not simply melt away when it is directed at nationalist objectives instead of progressive, redistributive goals.

But there’s an even-more-fundamental problem with the American System narrative. Its modern rehabilitators conveniently leave out the fact that every time it was tried in the 19th and early 20th centuries, Clay’s program unleashed a torrent of preventable policy disasters.

In 1828, a protective tariff pushed the country to the brink of disunion while also demonstrating Clay’s own inability to extricate his program from the slave economy. In 1861, Clay’s economic philosophy triggered a diplomatic crisis with Britain that unwittingly alienated an anti-slavery ally from the Union cause. In 1909, the heirs of Clay’s economics became so thoroughly beholden to the corrupt dealings of the tariff lobby that a section of their own party revolted and ushered in the haphazardly designed federal income tax system that plagues us to this day. And in 1930, Clay’s political progeny steered the country directly into economic ruin by embracing an American-System-inspired tariff program as its main countermeasure to the unfolding Great Depression. While Clay’s latter-day advocates jump at every opportunity to credit him for late-19th-century American economic growth despite a weak empirical basis for the claim, they also conveniently omit the track record of real and tangible blunders that followed from a century of experiments in American System economic policy.

In the case of the Clay-inspired Smoot-Hawley Tariff, the resulting collapse in international trade proved so disastrous that it largely expunged the American System’s advocates from both political parties in the post-war 20th century. Starting with the Reciprocal Trade Agreement Act in 1934, Congress embarked on a slow-but-steady retreat from protectionism that continued until the early 2000s. The passage of time has, unfortunately, dampened our memory of Smoot-Hawley’s self-inflicted wounds, to say nothing of Clay’s 19th-century failings. Now the National Conservatives deceive themselves into believing that they have rediscovered hidden knowledge from our economic past: knowledge that will allow them to beat the central planners of the left by putting their own spin on central planning from the right. In reality, they risk haplessly stumbling into the same mistakes that discredited Clay’s American System in the eyes of the last generation to experience its results.

America’s progressive left have always, either tacitly or by expression, bought into the impulses of economic planning. The shocking thing happening now is that we have conservative participation in the American System too, and why wouldn’t we? Tariffs are a dyed in the wool political winner for anyone who wants to push them onto the American people—even as they're a loser economically. Those people never seem all that interested in getting past the emotive costume of tariffs. “Let the other guy, the foreigner, pay the bill for a change.” That tariffs are coming back around to steal all kinds of American wealth never quite makes the evening news.

So elements of the right have jumped onto this centrally-planned economic train. And why wouldn’t they? There are illusions of easy political wins to be had. And that’s all you really need to know.

* * * *

Phil Magness is a Senior Fellow at the Independent Institute and the David J. Theroux Chair in Political Economy. He has served as Senior Research Fellow at the American Institute for Economic Research, and as Academic Program Director at the Institute for Humane Studies and Adjunct Professor of Public Policy in the School of Public Policy and Government at George Mason University. He received his Ph.D. from George Mason University' s School of Public Policy.

He is the author of multiple books and essays including Social Science Quarterly (Summer 2019) “James M. Buchanan and the Political Economy of Desegregation,” Co-authored with Art Carden and Vincent Geloso; “The American System and the Political Economy of Black Colonization.” Journal of the History of Economic Thought, (June 2015); “Morrill and the Missing Industries: Strategic Lobbying Behavior and the Tariff of 1861.” Journal of the Early Republic, 29 (Summer 2009);  The 1619 Project: A Critique; and Colonization After Emancipation: Lincoln and the Movement for Black Resettlement.

James Harrigan is a former Senior Research Fellow at AIER. He is also co-host of the Words & Numbers podcast.
Dr. Harrigan was previously Dean of the American University of Iraq-Sulaimani, and later served as Director of Academic Programs at the Institute for Humane Studies and Strata, where he was also a Senior Research Fellow.
He has written extensively for the popular press, with articles appearing in the Wall Street Journal, USA Today, U.S. News and World Report, and a host of other outlets. He is also co-author of Cooperation & Coercion. His current work focuses on the intersections between political economy, public policy, and political philosophy.

This article was previously post at the AIER blog, and is republished here under a Creative Commons 4.0 License.

UPDATE:

So you now have the information to correct the bizarre a-historical assertion just made (below) by the Moron In Chief. So as a quick pop-quiz question, explain in 20 words or less why he is so mistaken. [HINT: In relation to tariffs and the production of wealth, you should probably use words like "despite" rather than "caused by."]

UPDATED: "The richest 20 per cent of the world’s countries are now around 30 times richer than the poorest 20 per cent. Why? Differences in a society’s institutions."

"The richest 20 per cent of the world’s countries are now around 30 times richer than the poorest 20 per cent. Moreover, the income gap between the richest and poorest countries is persistent; although the poorest countries have become richer, they are not catching up with the most prosperous. ... Why? ... [D]ifferences in a society’s institutions. ...
    Europeans’ colonis[ed] large parts of the globe. One important explanation for the current differences in prosperity is the political and economic systems that the colonisers introduced, or chose to retain, from the sixteenth century onwards. The laureates demonstrated that this led to a reversal of fortune. The places that were, relatively speaking, the richest at their time of colonisation are now among the poorest. ...
    "In [these] colonies, the purpose was to exploit the indigenous population and extract natural resources to benefit the colonisers. In other cases [however], the colonisers built inclusive political and economic systems for the long-term benefit of European settlers. ... [These] settler colonies – needed to have inclusive economic institutions that incentivised settlers to work hard and invest in their new homeland. In turn, this led to demands for political rights that gave them a share of the profits. Of course, the early European colonies were not what we would now call democracies but, compared to the densely populated colonies to which few Europeans moved, the settler colonies provided considerably more extensive political rights. ...
    "[T]hese initial differences in colonial institutions are an important explanation for the vast differences in prosperity that we see today. ...
    "[This year's Nobel laureates in economics] have uncovered a clear chain of causality. [Mercantilist] institutions that were created to exploit the masses are bad for long-run growth, while ones that establish fundamental economic freedoms and the rule of law are good for it."

~ from the 'Popular Information' released by the Nobel Prize Committee, awarding this year's Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2024 to Daron Acemoglu, Simon Johnson and James A. Robinson. [Hat tip Conversable Economist]

UPDATE: Not everyone's happy that the Prize has gone to what economist Deirdre McCloskey calls "a B+ statist": 

McCloskey of course has her own answer to what caused the prosperity that Acemoglu et al ascribe to good institutions: a cultural change before the Industrial Revolution she calls the "bourgeois revolution." Her ideas are debated here. For what it's worth, I'm in agreement with the great Joel Mokyr who says, "Ideas mattered, but so too did institutions."