By: Javed Iqbal, COD Economics Professor
The tariff history of the U.S. is one of changing economic priorities, political philosophies, and global realities. As we try to understand the complex global trade dynamics, realizing the historical role played by tariffs can guide a more transparent and long-lasting policy approach, one that advances national interests without repeating the drawbacks of the past.
Origins of Tariffs: A Tool for Revenue and Protection
Tariffs are a type of tax or levy imposed on imported products. They serve as a means by which governments regulate trade and collect revenue. The history of tariffs goes back to ancient Greece, where tariffs were considered a source of public funds and a protection against international goods threatening domestically manufactured products in the world market. The first official introduction of tariffs in the United States was in 1789, when President George Washington signed the nation's first tariff law and set an average 5% tariff rate on most of the imported goods. It had two primary objectives: to restore post-Revolutionary War deficits and to shield emergent American industries from more advanced global competitors.
Firms and households suffer serious anxiety when a sharp change in economic policy is expected. While speculation about recent American tariff hikes has caused general worry, such sudden changes in trade policy are not unprecedented. On several occasions in history, tariff policy has turned out to be dangerously divisive. One such remarkable example is the so-called "Tariff of Abominations," signed into law by President John Quincy Adams in 1828. With tariffs on imports rising to a maximum of 38% on manufactured items and between 30% and 50% on selected raw materials, it was a blessing to the industrialized North but a misfortune to the agricultural South. The South, whose economy was heavily reliant on the importation of manufactured products and export of raw materials, felt the tariffs were an outright slap in the face. The political tension and the conflict within the nation gradually resulted in the Nullification Crisis, which was a dire warning of what tariff policies can do to threaten national unity and regional harmony.
Throughout most of the 19th century, tariffs were seen as an essential source of government revenue. But as the economy moved toward the 20th century, as American manufacturing grew and encountered more intense international competition, tariffs became a prominent tool for protectionism. However, that transformation occasionally impacted international trade stability. The 1930 Smoot-Hawley Tariff Act, which increased import duties by 20% on average, provoked retaliatory measures worldwide. The consequence was severe; it deepened the negative impact of the Great Depression and accelerated the global economic downturn that exposed the risks of reckless protectionism in an interdependent world.
A Turn Toward Cooperation
In 1947, the U.S. joined with other nations to establish the General Agreement on Tariffs and Trade (GATT) recognizing the need for a cooperative system of global trade. Through the subsequent rounds of negotiation- notably the Kennedy and Tokyo Rounds, GATT was able to reduce the average global tariff to an unprecedented low, including the tariff rates applied by the U.S. It was a giant step toward free trade and international economic cooperation.
Modern Shifts: Trump-Era Tariffs and Renewed Debate
American tariffs were low for decades, in line with the overall ideals of free trade. That era of accord continued until the beginning of President Donald Trump's first term, when his administration reinstated tariff-based policies as a means of rebalancing trade and protecting U.S. economic interests, particularly against China.
As one of the largest economies in terms of the size of GDP (Gross Domestic Product), the U.S.’s net exports (i.e., export minus import) has historically been negative, meaning a deficit is a common phenomenon in the recent U.S. trade. For example, in 2024, the U.S. trade deficit in goods and services reached $918.4 billion, up from $784.9 billion in 2023. The U.S. economy never had a trade surplus between 1970 and 2024, with the exception of insignificant trade surpluses in the year 1973 and 1975. The concern is about foreign countries imposing higher tariff on the U.S. products that are hindering U.S. exports. On the contrary, the U.S. sets comparatively lower tariffs on imports, as a result American consumers enjoy almost unrestricted access to foreign products forcing the trade deficit to increase over time. Concurrently, a prolonged continuation of the trade deficit forces the U.S. economy to lose a grip on the outflow of dollars, weakening its strength as a currency. These issues partly justify recent calls for universal and reciprocal tariffs worldwide.
On the flipside, the impact of tariffs primarily falls on the importing firms; however, the ultimate incidence ultimately falls on the final user of the good or service. Therefore, the actual payers of tariff revenues are not foreign exporters; rather, it is the consumer in the importing countries. A worldwide universal and reciprocal tariff set in one shot may force the prices of all representative goods in consumers’ baskets to rise and accelerate the rise of existing inflation.
The tariff history of the U.S. is one of changing economic priorities, political philosophies, and global realities. As we try to understand the complex global trade dynamics, realizing the historical role played by tariffs can guide a more transparent and long-lasting policy approach, one that advances national interests without repeating the drawbacks of the past.