Donald Trump officially became the 47th U.S. President (in addition to being the 45th President) after being sworn-in on Monday, January 20th.
President Trump, as we’ve become accustomed to, made numerous bold election promises, including the mass deportation of illegal aliens, corporate tax cuts, increases in government efficiency via the Department of Government Efficiency and the largest increase in tariffs in 100 years.
Time will tell how much of this was campaign rhetoric vs. implemented policy. This week’s chart highlights the weighted average U.S. tariff rate going back to 1920.
Notice the Smoot-Hawley Act (1930) marked the peak of U.S. tariffs (~20 per cent) which should provide caution for those in the Trump administration advocating for higher tariffs.
The Tariff Act of 1930, or the Smoot-Hawley Tariff Act, was a law which implemented protectionist trade policies in the U.S.
Sponsored by Senator Reed Smoot and Representative Willis C. Hawley, it was signed into law by President Herbert Hoover on June 17, 1930. The Smoot-Hawley Act prompted retaliatory tariffs by U.S. trade partners (sound familiar) which led to a reduction of U.S. trade by 67 per cent during the Great Depression.
Much has been written about this infamous piece of legislation by economists and historians who generally agree this Act significantly contributed to the Great Depression of the 1930’s.
“Those who fail to learn from history are doomed to repeat it” – George Santayana. Why would the U.S. consider implementing similar trade policies to those that contributed to the worst economic depression in modern history? This is a question currently being asked by many economists (including myself). Threatening tariffs doesn’t mean implementing tariffs – we’ll see if Trump’s bark is worse than his bite as it was in 2017.
Notice the period of the 1990’s up until the late 2010’s in the supplied chart – this was the golden age of free trade. The Canada-United States Free Trade Agreement was signed by Prime Minister Mulroney and President Regan on January 2nd, 1988. CUSFTA was the precursor to NAFTA which expanded North American free trade to include Mexico in 1994. The 30-year period from the late 1980’s until the late 2010’s was associated with global economic growth, the largest bull market in history and the emergence of China as a superpower. The link between free trade and economic growth has been well established, however, the pendulum has recently swung back towards protectionism and tariffs for several (mostly political) reasons.
Canadian officials (as was the case in 2017) have designed an extensive plan to retaliate against Trump’s proposed tariffs and we are America’s largest trading partner. Trump believes he is a skilled negotiator – earlier in his career, he wrote a book entitled, “The Art of the Deal” and I sincerely hope Trump’s tariff threats represent a negotiating tactic vs. actual policy. If Trump implements tariffs on the scale he has proposed, a global trade war would likely follow which could have a devastating impact on the global economy. The concept of Mutually Assured Destruction should apply to escalating tariffs if Trump’s team respects history – the last thing Trump wants as a proponent of a strong economy is to create a deep, prolonged recession caused by a global trade war.
Let’s hope history doesn’t repeat and cooler heads prevail in coming weeks and months.
Eric Van Enk is a wealth adviser & associate portfolio manager with National Bank Financial in Medicine Hat. He is a graduate of the University of Calgary, as well as a CFA charter holder with 20 years of financial markets experience in New York, Toronto and Calgary. He can be reached at eric. vanenk@nbc.ca
