Trump’s Hoover Temptation
Donald Trump’s decision to impose steel and aluminum tariffs and the resignation of chief economic adviser Gary Cohn this week mark a dangerous moment in his Presidency. To wit, is this when an Administration that has pursued surprisingly sensible economic policies veers into the Herbert Hoover ditch?
We use the Hoover comparison advisedly because he was the last Republican President who embraced tariffs as sound economic policy. George W. Bush imposed steel tariffs in 2002 but at least he did so in the name of getting trade-promotion authority through Congress. He put an initial time limit of three years and ended them early.
Ronald Reagan also agreed to targeted restraints on imports of cars and some other goods. But when Congress considered more dangerous trade restrictions, the Gipper issued a warning. “Some of us remember the 1930s, when the most destructive trade bill in history, the Smoot-Hawley Tariff Act, helped plunge the nation and the world into a decade of depression and despair,” he said in a weekly radio address in 1985. “If the ghost of Smoot-Hawley rears its ugly head in Congress, if Congress crafts a depression-making bill, I’ll fight it.”
Reagan understood this because he had lived through the depression and absorbed the lessons of its causes. Hoover had doubts about Smoot-Hawley as it moved through Congress in 1930, and 1,028 economists signed a letter urging him to veto it. But the businessman-politician understood little about economics, and tariffs at the time were what the economist Joseph Schumpeter called the “household remedy” of the Republican Party.
Economists still debate the causes of the Great Depression, but there’s little dispute that the trade war that followed Smoot-Hawley made the downturn worse. Global trade contracted. U.S. imports, which were $5.9 billion in 1929, fell to $2.1 billion over the next three years. Deflation took hold.
The economic historian Charles Kindleberger judged that the root cause was a lack of a global leader to repel narrow economic nationalism. Britain had led the world trading order for a century but was exhausted by World War I. The U.S. should have taken the mantle but didn’t. “When every country turned to protect its national private interest, the world public interest went down the drain, and with it the private interests of all,” Kindleberger wrote.
The trauma unleashed by Smoot-Hawley led to some self-reflection, even in Congress, which empowered Secretary of State Cordell Hull to negotiate trade-expanding bilateral accords in the 1930s. After World War II the U.S. led the effort to create the General Agreement on Tariffs and Trade, or GATT. For decades a rough consensus held in the U.S. that trade was crucial to prosperity, and every U.S. President until Donald Trump adhered to that belief to one extent or another.
What makes the current moment especially dangerous is a confluence of political forces not unlike those of the 1930s. This Republican Congress is less protectionist, but Congress over recent decades has ceded much of its trade authority to the President. The not unreasonable assumption was that Congress represented particular or regional interests while a President would act in the national economic interest.
But even Members who created trade statutes like 201, 301 or 232 never anticipated that a true-believing protectionist like Mr. Trump would become President and wield that unilateral power. He believes against all economic evidence and history that a nation’s trading balance is a zero-sum proposition—deficit bad, surplus good.
Meanwhile, no other nation is ready to lead in America’s place. Chinese President Xi Jinping has auditioned for the job in places like Davos, but China’s policies have become more mercantilist and predatory under Mr. Xi’s regime. The world doesn’t trust China.
The better news is that 11 other Asia-Pacific nations this week signed the tariff-reducing Trans-Pacific Partnership that Mr. Trump abandoned, and many other nations are striking trade deals with each other. This might limit the global damage from a protectionist America, though as the largest economy the U.S. can still do great harm.
The question is how far Mr. Trump will go with his protectionist eruption. Equity markets were up slightly Thursday on hearing that Mr. Trump is carving out exceptions to his metals tariffs for Canada and Mexico pending a renegotiation of Nafta. This is still an economic gun to the head, including America’s, since withdrawing from Nafta would do far more damage than steel tariffs. And offering to exempt other countries as long as they satisfy certain U.S. demands will create a new mess of uncertainty and politically managed trade.
Looming as well is Mr. Trump’s vow to open a protectionist assault on China. Beijing’s bad practices need addressing, not least its intellectual-property theft and ill-treatment of foreign companies trying to operate or sell in the Chinese market. But this is best handled with market-opening diplomacy, not blunderbuss tariffs that are sure to lose at the World Trade Organization and invite retaliation.
The danger with trade brinksmanship is that its outcome is impossible to predict. If countries retaliate against Mr. Trump’s steel taxes, his Donald of Queensborough rules might command that he hit back in kind. If nationalist politics take hold in the U.S. or other countries, no one can predict the ultimate economic damage—or worse. Some historians believe that Japan concluded from Smoot-Hawley in the 1930s that the U.S. wouldn’t tolerate the expansion of Japanese trade. We know where that led.
The danger is compounded by Mr. Cohn’s departure and the emerging dominance of Mr. Trump’s antitrade advisers—Commerce Secretary Wilbur Ross, domestic White House aide Stephen Miller, U.S. trade rep Robert Lighthizer and protectionist-at-large Peter Navarro. If Mr. Navarro replaces Mr. Cohn at the National Economic Council, the rational move would be to flee the stock market.
Mr. Trump needs a pro-growth replacement who will give him an alternative view. Outside advisers like Larry Kudlow and Art Laffer have all told him his protectionist turn is folly, so bringing someone like them or former Senator Phil Gramm into the White House will be a test of how open to differing views Mr. Trump really is on trade.
Perhaps free traders in Congress will begin to find their voice again, as 107 House Republicans did this week in a letter to Mr. Trump opposing the metals tariffs. They realize that a trade war will compromise the economic gains from tax reform and deregulation and further jeopardize GOP control of Congress. But they’ll get little help from Democrats like Senate Minority Leader Chuck Schumer, who is cheering on Mr. Trump knowing his party will benefit from economic turmoil.
All of which puts the onus on Mr. Trump to reconsider his march to trade war. The policy successes of his first year have set the economy on the strongest growth path in 12 years. He risks that progress and more if he embraces the protectionism that doomed Herbert Hoover nearly a century ago.