American Tariff War Relies on 19th Century Tactics
April 26, 2025 1:50 PM - Opinion
After World War II, America's share of the world's gross domestic product (GDP) continued to decline. According to the World Bank, by now this share has dropped from 52% in 1944 to 14% in 2024.
Author: Dmitri Skolzov - Economic Commentator
Following the end of the American Civil War (which was largely caused by conflicts over tariff policies between the North and South), the victorious Republican Party long implemented a policy of imposing protective tariffs on imported goods. This period in American history is known as the "Great Protectionist Era." Its greatness lay not only in the high rates of these tariffs, averaging 40% to 50%, with levels reaching 57% in 1897.
During the 35 years of high tariffs, the United States transformed from an agrarian-based country into the leader of global industrial production. During this time, active railroad construction (and the transition from iron to steel rails) increased U.S. steel production from 70,000 tons in 1870 to 11,200,000 tons in 1900. Between 1865 and 1916, railway mileage expanded from 56,000 kilometers to 410,000 kilometers (exceeding the combined total of Britain, Germany, and France).
By the turn of the century, the U.S. had become the largest economy in the world, far surpassing its two main competitors - the British Empire and Germany. The per capita GDP of the U.S. was twice that of Germany and France and 1.5 times that of the UK.
The question today lies in whether the methods of the 19th century can still be applied in the current complex global market environment, where the production of advanced technologies relies on extensive international cooperation and fragmented technology chains. However, reindustrialization is a long-term process, not taking years but decades. So what are Trump's goals in the short to medium term?
Changing the Source of U.S. Budget Revenue
Donald Trump emphasized when announcing import tariffs that before 1913, import tariffs formed the basis of federal budget revenue, while after that, the tax burden began to shift to ordinary Americans (today, personal income tax brings the largest amount of revenue to the U.S. budget).
In 19th-century America (especially in sparsely populated areas of the Midwest and Far West), managing personal income tax was much more difficult than collecting import tariffs.
But the issue goes beyond that. Low tax rates promoted entrepreneurship and lowered barriers for small businesses entering the market. Coupled with the development of vocational education in the second half of the 19th century, this created conditions for the emergence of numerous small engineering companies and businesses engaged in complex technical services.
However, Trump's efforts during his first term to reform the U.S. education system have primarily focused on combating gender-diversity policies and so-called "woke" initiatives pushed by Democrats. Establishing a talent cultivation system in the production sector is also not an overnight achievement.
Replacing personal income tax with import tariffs would allow Americans to relatively easily cope with the price increases of goods subject to these tariffs. But the question is whether such adjustments are feasible from any slightly longer-term perspective, especially considering the difficulty of passing the U.S. Congress budget.
Trade Balance and Economic Growth
For countries without their own gold or silver mines, trade surpluses over the past few centuries were equivalent to the ability to issue currency today. At that time, the world reserve currency (gold ultimately played this role). The discovery of the California Gold Rush in 1848 and the Alaska Gold Rush in 1898 provided strong impetus for the U.S. economy.
Other ways to increase the money supply included foreign borrowing and foreign investment (in both cases, funds flowed into the country). By the end of the 19th century, Russia had to attract loans (including for railway construction), while the U.S. attracted foreign investment (mainly from Britain).
The establishment of the Federal Reserve System (Fed) aimed to change this situation and partially replace foreign investment with domestic currency issuance. However, due to the existence of the gold standard, even Fed banks could not print dollars without sufficient gold backing.
After the outbreak of World War I, the situation changed. The demand from the belligerents (mainly the Allies) for American material supplies led to astronomical trade surpluses for the U.S. If the gold reserves of Britain and France were exhausted, this growth would quickly come to an end. In this case, the Fed began to print dollars backed by foreign government debt.
During World War II, history repeated itself on a larger scale. At that time, the U.S. provided material supplies to allies through the Lend-Lease Act, and the Fed created an industrial economy larger than the combined total of all other economies in the world through monetary issuance.
However, this situation was not static. After World War II, America's share of the world's GDP continued to decline. According to the World Bank, by now this share has dropped from 52% in 1944 to 14% in 2024.
Trump hopes to reverse this trend. To understand how to achieve this, it is necessary to clarify the reasons behind this trend.
The Era of Reserve Currency Issuing Countries
In 1944, the dollar became the sole world reserve currency, opening up new prospects for the Fed. The volume of currency issuance greatly increased. Funds flowed into Europe and Japan and returned to the U.S. in the form of purchasing American products. However, after the Marshall Plan ended, as war-ravaged economies recovered, the Fed might face the problem of how to offset the dollars flowing back to the U.S.
However, the inflow and outflow of dollars were not limited to the above model. The U.S. took on the responsibility of protecting the so-called "free world" and resisting the "Soviet threat." The expenditure on maintaining military bases around the globe became another channel for dollars to flow out of the U.S. Another channel was direct U.S. investment in foreign economies. Whether these investments were private - they all led to the outflow of dollars, helping maintain balance.
The growth of the total amount of dollars (especially its overseas portion) was constrained by the size of America's gold reserves. Nixon's decision in 1971 to stop the conversion of dollars to gold seemed to completely remove the restriction on the volume of currency issuance.
In fact, the natural limiting factor for currency issuance is the scope of dollar circulation. After World War II, this scope expanded because of the Marshall Plan, which allowed European economies to grow. International labor division deepened, and the volume of world trade settled in dollars also increased. By the late 1970s, this potential had been exhausted, and since then, the U.S. has been mired in stagflation. Reagan found a way out during his administration, beginning to stimulate the domestic economy on a large scale by stimulating domestic demand through credit. This was only a temporary solution because it was impossible to indefinitely increase household debt. However, in the 1990s, the socialist system began to collapse, and Eastern European countries, former Soviet republics, and even Russia itself were incorporated into the dollar circulation range.
However, only if Moscow and Beijing could be persuaded to change their course and make their economic policies comply with the advice of Western economists would the scope of dollar circulation possibly expand further. Trump understands that this is unrealistic. This means that the original model based on dollar issuance will face increasing problems in the near future. Moreover, the U.S. cannot rely on this model in its strategy of reindustrialization.
International Financiers - Obstacles to Reindustrialization
Another important area for the expansion of the dollar's circulation range is the deepening of international labor division under globalization. What is meant here is not just providing services for increasingly complex production chains. In the process of globalization, as commodity markets developed, obstacles to capital flows were eliminated, and international financial markets were formed.
In fact, over the past 25 years, multinational financial institutions have strengthened their control over the world economy through tools in financial markets.
The problem is that this process has brought little benefit to the U.S. economy. Indeed, the stock prices of American tech giants and international financial companies have risen. The size of the U.S. financial market has also expanded. But to sustain economic growth, more and more subsidies for demand (through increased national debt) were needed, and this demand increasingly pointed to cheap imports from related countries and Southeast Asian countries, as well as luxury brands from Europe.
This is the natural result of the U.S.'s attempt to occupy the top of the food chain in the process of globalization, where the proportion of banking and financial services departments in the U.S. economy has grown disproportionately. But the development of this department also encountered natural limits. If in 1900 the profit of this department accounted for about 5% of the total profits of the world economy, according to different estimates, the proportion of financial departments in income has reached 70% to 80% so far.
This is not surprising because the return on financial transactions far exceeds the return on investment in the real economy. That's why financiers have strengthened their control over the (American and world) economy. But now there is no room for further growth in the financial sector. Moreover, the successful operation of the financial sector itself becomes an obstacle to reindustrialization. As long as the returns in financial markets are higher, investments that could have been directed to the real economy are drawn to financial markets.
America's Tiered Goals
Given that the Republican Party does not have a clear advantage in both houses of Congress, and that Trump's control within the party is not absolute, the 47th U.S. president urgently needs quick success or at least some achievements that can be packaged as successes. The agreement of 75 countries to negotiate new tariffs with the U.S. is seen as such a victory.
For Trump, another key factor is that his political opponents are supported by international financiers and represent their interests. Trump is interested in weakening their influence and depriving them of resources. But it is difficult to do so without controlling the Fed (which is privately owned, and the government's ability to intervene in its operations is very limited).
Therefore, if Trump hopes for positive changes in the real economy, he may easily take measures that could cause a stock market crash. All discussions about possible shifts to cryptocurrencies are not only a threat to international financiers and even the Fed, but also a negotiation invitation and a means to persuade them to abandon support for Trump's political opponents. Although不排除 the possibility of some secret plan.
As for positive goals, a significant task of Trump's tariff threats is to prompt producers whose products have demand in the U.S. market to relocate production back to the U.S.
For Southeast Asian countries (which have been hit hardest by the tariffs), Trump will force them to reduce cooperation with China and increase imports from the U.S., creating a model in which the U.S. becomes a high-tech exporter and these countries agree to act as suppliers of raw materials and low-cost consumer goods.
When analyzing Trump's intentions, it must be considered that he faces opposition from resource-rich rivals who also control a substantial part of the U.S. media. Meanwhile, chaos and wavering occur within his own camp. He has to conceal his main attack direction, attempting to confuse everyone with unexpected actions to make it difficult for opponents to organize systematic resistance.
Original article: https://www.toutiao.com/article/7497901804743803404/
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