Trump Says Tariffs Helped 'Build America.' He's Missing Some Important Context.

Trump is wrong about tariffs and so was Alex Hamilton.


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After the ratification of the Constitution, the very first law passed by the new Congress was the Tariff Act of 1789. It imposed an 8 percent tax on pretty much all imports into the United States, with the revenue from the tariffs used to fund the new national government and to pay down debts accumulated during the Revolutionary War.

This bit of early American history seems to be what President Donald Trump was gesturing towards with a Wednesday tweet declaring that America "built on tariffs."

And, indeed, Trump has suggested that the tariffs could help pay off the national debt. The math doesn't really work out on that one—the tariffs have generated about $1.4 billion so far, which is hardly even a drop in the bucket against a $21 trillion national debt, as I've pointed out before.

But set aside those technicalities, and the fact that America's economy in 2018 is literally nothing like the nation's economy in 1789. Today, we have more wealth—in large part because of the benefits reaped from trade—but also far more debt than the Founders could fathom.

Still, there's something to be learned by contrasting the Tariff Act of 1789 with Trump's tariffs of 2018. The key difference between today's tariffs and America's first experiement with import taxes is that those old-timey tariffs were used to raise revenue, rather than as protection for domestic industires. This distinction was hard-won, as northern industrial interests tried to use their influence—through their avatar, Treasury Secretary Alexander Hamilton—to impose higher tariffs that would have served as protectionist measures.

Hamilton's argument wasn't all that different from Trump's. He wanted tariffs for what basically amounts to national security reasons—as a way to protect America's nascent industries, without which the country would struggle to survive as an independent nation. Even though he lost that argument to the Jeffersonians, Hamilton's proposed tariffs were a least more closely connected to a legitimate national security concern than Trump's are.

While they weren't protectionist policies, those early tariffs did solve a very practical revenue problem for the early United States government. In those days before H&R Block (indeed, before income taxes) collecting taxes was a difficult prospect. It was much easier to post-up customs officials at every port and collect taxes on the physical stuff that came ashore than to send tax collectors to every town and borough across 13 states to collect taxes from the populace—espescially since many of those would-be taxpayers weren't entirely sold on the idea of a powerful central government, and had a recent history of armed rebellion against excessive taxation.

The tariffs-for-revenue versus tariffs-for-protectionism distinction is an important one, though Trump seems to struggle with grasping the difference. Today, tariffs have fallen out of favor with virutally all governments around the world as means to raise revenue because there are many alternative ways for governments to collect tax revenue from the general public that are considered to be less damaging to the economy than tariffs—though, of course, all taxes have a distorting effect on how goods, services, and investments are allocated.

But tariffs can still be a tool of protectionism. Indeed, explicitly protectionist tariffs were enacted by Congress in 1815 and again in 1828. On both occasions, they imposed economic costs, failed to achieve their policy goals, and fostered political dysfunction that pushed America closer to the Civil War. Another round of protectionist tariffs enacted during the 1930s is now widely credited with worsening and extending the Great Depression.

Pretty much all of Trump's justification for tariffs—ranging from the ridiculous claims about national security to the possibly illegal suggestion that he's using them to gain leverage in trade negotiations—recognize this function of tariffs. That he's lately begun trying to shoehorn some sort of revenue argument into the debate over taxes is either a misdirection or a signal that the president is woefully uninformed about the economic issues at play. Choose for yourself which it is.

If Trump wants to make the argument that America should use tariffs to raise revenue, like we did in the 1790s, he better have a plan to abolish all federal taxes on income, investments, and labor. If he wants to have that discussion, well, I'll listen.