Having died in 1745, Robert Walpole never saw a locomotive, steamboat, or cotton gin. However, he still helped trigger the Industrial Revolution, using what some now treat as a dirty word: tariffs.
Walpole, whose 21-year tenure as Britain’s prime minister was longer than anyone else’s, imposed high tariffs on goods that could be made in Britain. At the same time, he subsidized exporters and lowered tariffs on raw materials that would be used for local manufacturing.
It was unbridled protectionism, and it worked wonders, making Britain the world’s leading wool producer, and soon afterward the leading textiles manufacturer that would later dominate global production of engines and machines.
Tariffs were a natural part of the international economy, so much so that one of the first laws the young US Congress passed was the Tariff Act, which charged between 5% and 50% duties on imports like tobacco, iron, and cloth.
American protectionism was so blunt that by 1903, US tariffs were perceived in Britain as an economic threat, so much so that the colonial secretary of the day, Joseph Chamberlain, launched a campaign to hike British tariffs in retaliation.
In Israel, protectionism helped fuel breakneck growth – an annual 10% – throughout the 1950s. Older Israelis still remember the days when much of the middle and working classes wore Ata shirts, Lodzia underwear, and Hamegaper sneakers, all of which reflected Israel’s emulation of Walpole’s shtick: subsidies and tax breaks on the inside, tariffs on the outside.
It follows that President Donald Trump’s idea of hiking tariffs is neither novel nor scandalous. That doesn’t mean what he is up to is economically workable, or politically sane.
Era of high tariffs
THE SAME Israelis who remember the era of high tariffs also remember its grim end. Challenged by poorer countries’ low labor costs, Israel’s textiles manufacturers collapsed one after the other. The same thing happened to other low-tech Israeli products, from car tires to batteries.
Tariffs, it turned out, were a good taxation tool, and for a while also a way to create local jobs, but tariff manipulation could not defeat the forces of supply and demand.
What starts with stimulus and protections initially generates much production, and thus creates jobs and spurs prosperity. But prosperity then raises salaries, which in turn makes local products cost more. That, and not tariffs, is why British imports of manufactured goods soared from only 5.5% of all imports in 1860 to 25% by 1903.
Older Israelis recall another problem with excessive duties: quality. The Hamegaper sneakers that Israeli kids wore last century were not even pale imitations of the Nike, Adidas, and Reebok alternatives. The imported shoes cost more than twice the locally produced sneakers but were infinitely stronger, softer, and prettier, and everyone preferred them, despite the duties.
Gradually, the government’s obstruction of market forces created un-demanded supply, and thus hidden unemployment, and unsupplied demand, which in turn fanned inflation. All this was a major part of the hyperinflation crisis that Israel ended in 1985 with the austerity plan that included, among other measures, a grand retreat from tariffs and industrial subsidies.
What, then, should Americans now expect as their government goes in the opposite direction of the path Israel took 40 years ago as it parted with its socialist past? Initially, Americans can expect some positive results but then they will be disappointed, and ultimately they will be stunned.
WHERE TARIFFS will initially deliver results is the Chinese front.
Chinese subsidies, tariffs, and currency manipulation contributed to the decline in American manufacturing, as reflected in American steel production’s plunge from more than 140 million metric tons in 1970 to less than 80 million metric tons today.
Chinese output, at the same time, soared to more than one billion metric tons. The same goes for American manufacturing jobs’ dive from nearly half the American workforce in the 1950s to hardly one-tenth today.
Will Trump’s punitive tariffs shift jobs from China to the US? They will, to some extent, and for some time. Unlike Israeli goods, which must be exported because the local market is minuscule, the American economy is so big that its manufacturers don’t have to export in order to thrive.
However, China did not alone spawn America’s manufacturing crisis. Automation was an even bigger culprit, and the rise of the service economy was another. Moreover, taxing China will hardly be enough to rehabilitate American manufacturing because cheap labor abounds in many other countries, from Vietnam and Indonesia to Mexico and Brazil.
Trump realizes this, and his solution is to wage economic war on everyone, everywhere, all the time – an aim that, if realized, will breed catastrophe.
PUNISHING CHINA might work economically and also makes sense diplomatically. It’s self-defense. But why stick it to Canada, Mexico, and Europe?
The Canadian case is the most absurd. If American manufacturing is to recover, it will need the raw materials with which Canada is endowed.
If tariffs on Canadian timber rise, then the price of American-made furniture will also rise. Robert Walpole, the father of industrial protectionism, understood this simple economics even before the science of economics was born, and thus lowered tariffs on raw materials British manufacturing needed. But Trump’s aim is not protectionism. It’s bullying.
Rather than strive to make China change its economic ways, Trump is adopting China’s attitude, and worse: By carving the world economy into enemy zones, he is inspiring an all-on-all war, an era of international suspicion, rivalry, scheming, and self-service, in the spirit of what Italian fascists hailed as “sacred egoism.” That’s how mankind traveled to last century’s world wars.
One of Trump’s most promising election vows was to “end wars.” Well, a tariff rampage is no way to end wars. It is, however, a way to start them.
The writer, a Hartman Institute fellow, is author of the bestselling Mitzad Ha’ivelet Ha’yehudi (The Jewish March of Folly, Yediot Sefarim, 2019), a revisionist history of the Jewish people’s political leadership.