The Trouble with Tariffs
- Andrew Thompson
- May 13
- 6 min read
The current trade tariff debacle finds its roots way back in history. The ‘Make America Great Again’ rhetoric has a form of restorative nostalgia at its core – an ambition to restore back to former glory days, incorporating the shift in economic values linked with 21st century imperatives. The prospect of modern factories in America, supplying goods at home and abroad, at scale, clearly upsets other mercantilist nations who have spent decades creating an ultimate dependency for cheap products in the largest consuming nation on the planet.
Trade tariffs have a long history, dating back to ancient civilizations. They were initially used as a means for governments to generate revenue and protect local industries from foreign competition. The concept of tariffs can be traced to the early days of international trade, where city-states and empires-imposed duties on goods entering their territories like a form of economic toll booth.
Trade tariffs and Value-Added Tax (VAT) are distinct forms of taxation with different purposes and applications. Trade tariffs are imposed on imported goods to protect domestic industries and generate government revenue, making foreign products more expensive and encouraging local consumption. In contrast, VAT is a consumption tax applied at each stage of production and distribution, ultimately borne by the final consumer. Unlike tariffs, VAT is designed to be neutral and non-discriminatory, ensuring all products, whether domestic or foreign, face the same tax treatment. While tariffs can create barriers to international trade, VAT promotes a level playing field for businesses regardless of their origin.
David Ricardo was a prominent and celebrated British economist known for his influential contributions to economic theory in the so-called enlightenment period of the early 19th century. He is most famous for his theory of Comparative Advantage, which explains how countries can benefit from trade by specialising in the production of goods they can produce most efficiently. For example, France should make the wine, Britain should weave the cloth, and Argentina should grow the beef – each playing to its strength and, thereafter, trading globally. Ricardo's work laid the foundation for modern international trade theory and emphasised the importance of free trade and globalism, where nations sell their “best-of-breed” products and services profitably around the world. Ricardo's ideas have had a lasting impact on economics, shaping policies and debates on trade and economic growth.
As explained by The Acid Capitalist, Mr Hugh Hendry, Ricardian theories when applied in real life and amplified can sometimes distort creating an unhealthy dependence on the entity or country that is deemed to possess the comparative advantage. Likewise for the company or nation which owns the comparative advantage, a failure to adapt, modernise and change over time will bring ultimate collapse. It’s a tough business!
One example being Argentina's failure to modernise its economy has been a significant factor in its decline from one of the world's wealthiest nations to its current state of economic instability. In the early 20th century, Argentina enjoyed prosperity due to its rich natural resources and strong agricultural sector. Wide-open plains and wide-open skies were the perfect accompaniment to grazing the highest quality beef, which found high demand and even higher prices in fine restaurants and a place on dining tables of the wealthy on a global scale. Buenos Aires remains the only city outside London to once have its own Harrods store. Such was its wealth, Buenos Aires was the first city in the world to open a branch of a leading American bank. The white linen-clad oligarch owners of the super-profitable estancia estates saw no need to invest for the future or automate or develop an educated work force. Far easier to pile up wealth in the assumption nothing would ever change. Much has changed. The shift towards socialist policies in the 1940s, under President Juan Perón, marked the beginning of economic troubles. These policies led to inefficiencies and a lack of competitiveness, causing the economy to stagnate. Over time, Argentina's inability to adapt to global economic changes and modernise its industrial base has resulted in persistent inflation, debt, and economic crises. This failure to modernise has left the country struggling to regain its former economic standing. However, the present-day President Javier Milei appears to be forging positive change.
How to avoid becoming a slave to and dependent upon the supplier nation or company owning the comparative advantage is vital to long-term sovereignty or even survival.
Let’s explore some examples.
The imposition of tariffs in America is as old as the nation itself. George Washington bubble wrapped budding American industry from the “Old World.” Alexander Hamilton, one of the Founding Fathers of the United States, played a pivotal role in shaping the nation's economic policy. As the first Secretary of the Treasury, Hamilton devised a system of tariffs to protect American industries from foreign competition, particularly from the Old World (Europe). Hamilton imagined a nation which could stand alone in the world and not be enslaved to any other nation. Blessed with abundant natural resources, geographic scale, and a young, growing population, he foresaw an opportunity to scale growth. In his 1791 Report on Manufactures, Hamilton advocated for tariffs on imported goods to encourage domestic production and reduce reliance on European imports. He believed that a strong manufacturing sector was essential for the nation's economic independence and growth. By imposing tariffs, Hamilton aimed for structure and to foster the development of American industries, create jobs, and generate revenue for the government. His policies laid the foundation for the United States' economic strategy in the early years of the republic.
Abraham Lincoln's use of tariffs was part of a broader economic strategy during his presidency, particularly in the context of the Civil War. Lincoln supported high tariffs to protect Northern industries and generate revenue for the Federal Government. These tariffs were part of the Morrill Tariff Act of 1861, which significantly increased duties on imports from the Southern Confederate States whose policies and practices he saw as being immoral. While the primary aim was to bolster the Northern economy, the tariffs also had an indirect impact on the Southern states. The South, which relied heavily on agricultural exports and imported manufactured goods, found these tariffs burdensome. The increased cost of imports strained the Southern economy, exacerbating tensions between the North and South. Lincoln's tariff policies thus played a role in the economic dynamics of the Civil War, where immoral profits were ultimately replaced and a United States of America was born.
In more recent years Ronald Reagan, George W. Bush, Barack Obama, and Joe Biden all used trade tariffs to protect US industry.
In modern day America, the domestic consumer is a major component in GDP composition and growth – both at home and abroad. This strength is a key driver of the US economy, reflecting the confidence and purchasing power of American consumers. Exporting nations heavily depend on US consumption, as America is a major market for their goods. For instance, countries like China and Mexico rely significantly on exports to the US to sustain their economic growth. This interdependence highlights the global impact of US consumer behaviour — where shifts in spending patterns can influence international trade dynamics. Has the interdependence become a dependency which will undermine the fabric, success and, ultimately, the dominance of the United States?
The US has become increasingly dependent on cheap Chinese goods due to China's ability to produce a wide range of products at lower costs. This dependency spans various sectors, including electronics, clothing, and pharmaceuticals. China's manufacturing capabilities and economies of scale allow American consumers to enjoy affordable prices on everyday items. However, this reliance also exposes the US to supply chain vulnerabilities, as seen during trade tensions and the COVID-19 pandemic. The once prosperous “blue-collared America” has been in decline, unable to compete with cheap international goods whilst Wall Street and the Technology and Communications sectors have thrived.
President Trump’s tariff and trade policies are amongst the clearest and bravest moves in multiple decades to reinvigorate the United States’ manufacturing prowess and to free the nation from dependency on China — particularly from the relentless supply of cheap goods which are seen to be systematically hollowing out America and encouraging social and structural malaise. In a move perhaps closer to Alexander Hamilton during the foundation years of the Republic, Trump is attempting to create a modern form and structure to America’s economy to reduce dependency, lengthen US hegemony and to create modern manufacturing scale to take on other mercantilist nations and inevitably to ‘Make America Great Again’.
