As we explored in an earlier piece, tariffs have been with us for quite some time - and usually with mixed, divisive results. As you all know, we are undergoing a complete rework of the global trade regime under the Trump Administration. Nobody knows what will happen (though policy experts on both sides have vociferous opinions that masquerade economics as fact).
When I studied for and earned the CFA, the economics curriculum literally said that none of this works in practice. But you should understand the prevailing theory. So, if you hear anybody touting economics theory as “fact,” - be forewarned. It has very little explanatory power.
Everybody is talking about the Smoot-Hawley Tariffs, which were mostly perceived as an epic policy failure and something that seriously exacerbated the Great Depression. But let’s go a different direction in history and talk about…
The Tariff of Abominations.
Because while tariffs are a tool that governments can legitimately use, they have a divisive legacy. And none more so than the Tariff of Abominations. Or the TOA for short (in my own world).
It’s a fascinating tale and something that doesn’t get as much press as it deserves. Mainly because - hey - if you think politics are divisive today, you ought to try the period between 1820 and the outbreak of the Civil War. This is an era, after all, where one senator almost caned another to death on the floor of the Senate.
In the aftermath of the War of 1812, America’s young industries (mostly concentrated in the North and the Midwest) were struggling against Britain’s mighty industrial edge. Northern industrialists were super eager for greater protection.
Add to this mix a politically charged Presidential Election between John Quincy Adams and Andrew Jackson (whom we discussed in some detail in The Central Banks—Part 4).
So here’s where things get juicy.
Jackson’s supporters in Congress cooked up a shifty little strategy - they would propose a tariff so extreme it would protect Northern industrialists but also slap absurdly high duties on raw materials Southerners just didn’t care about (like hemp and iron). The idea was to force Northerners to reject the policy, thereby embarrassing Adams and making Jackson look like the “free-trade savior of the South.”
Except, it didn’t quite work out this way. The Northern Industrialists were so eager for protection that they didn’t balk - they tweaked it (minorly) and passed it. On May 19, 1828, it squeaked through 105-94 in the House and 26-21 in the Senate. Adams signed it into law despite knowing the maelstrom it would cause.
The tariff was brutal. It had duties of 45 - 50% on imports like woolens (61%), iron (50%), and hemp (45%). Compare that to the baseline 10% that President Trump recently levied.
The entire tariff policy had one huge winner (northern Industrialists) and one huge loser (southern farmers and agrarian landholders).
Predictably, the fallout was enormous. First, Britain retaliated by tariffing US goods - including cotton! - which was enormously painful to Southern manufacturers specifically. It also forced Southerners to buy Northern manufactured goods - which may have been the intent all along. In fact, that was the intent - after all, Northern Industrialists were struggling to compete with imported goods and wanted to create a home market for their goods.
But the South was infuriated. They felt they were being forced to buy more expensive goods to benefit their Northern brethren, who were also agitating to remove the Peculiar Institution. And so what could they do?
South Carolina branded the law “abominable”, which gives it its great historic title - The Tariff of Abominations.
But then South Carolina tried to nullify the law entirely in the Ordinance of Nullification passed in 1832, declaring the Tariffs of 1828 and 1832 (a milder follow-up) void within their borders. They essentially claimed that states could simply ignore Federal Law. At this point, Andrew Jackson, who was president, stepped in and threatened to use soldiers to enforce the law.
The entire Union teetered on the brink of Civil War. Jackson pushed Congress for the “Force Bill” (passed March 2, 1833), which would authorize military action to enforce the tariff. But behind the scenes, Senator Henry Clay (known to posterity as “the Greater Compromiser”) brokered a deal. The Tariff of 1833, passed the same day as the Force Bill, gradually reduced duties over a decade. It wasn’t a full rollback, but it gave Southerners enough relief to back off and not force an armed conflict.
The ramifications of this entire saga are incredible. First of all - the President of the United States had threatened to use force against a member of the Union. In many ways, the seal was broken. Force could be used - in either direction - to get what any party wanted. North-South relations were seriously poisoned - a single, decisive step in the direction of the Civil War.
It’s also telling that inflation rose—but only in parts of the country. No hard CPI data exists from the period, but contemporary accounts scream about “oppressive cost increases.” The North, by contrast, was relatively unaffected. The tariff shielded their goods and kept prices steady while boosting their profits. In other words, it was a decisive win for Northern Industrialists.
We can take away a few thematics because some principles are indeed timeless. And I firmly believe that history rhymes, if not repeats.
Winners vs. Losers
Similar to the Tariff of Abominations period, this latest set of tariffs will produce winners and losers in the United States (of today). Inflation is likely to rise (though left unsaid is that if it also torpedoes the economy, demand will tank, which may cause inflation to be muted. But is that good?).
Rising inflation will primarily hit the poorest Americans hardest.
It’s probably fair to say that - short term - the benefits will skew narrow, the pain will spread wide. Inflation is a likely result, as I’ve already said. The beneficiaries will most likely be domestic manufacturers who are now protected, similar to the Northern Industrialists.
Who else loses? How about farmers exporting soybeans and pork? They’re going to get crushed - just like the 1828 cotton crowd. Consumers probably won’t love a 10% increase in electronics, cars, and clothing either.
Long-term, there is a thesis that this will spark a renaissance in American employment and manufacturing. I think the benefits will mostly be felt in the core of the country, and the coastal states will mostly groan.
Executive Overreach
Something we’re testing daily with the new Administration is - what are the limits of Executive Power?
While I doubt we see a “nullification crisis” type situation, one thematic that is absolutely going to be put to the test is the limits of President Trump’s power. Similar to Jackson “breaking the seal” on Federal force to implement his policies, it’s a certainty that the Legislative Branch will contest this at some point. Fighting will ensue (legislative fighting).
Political Bravado Backfiring
The TOA was a policy mistake - literally, a grossly heavy tariff bill designed to fail. One theme we seem to be facing globally is a huge risk of dramatic escalation.
Politicians of all stripes are currently engaged in the early days of a huge and new trade war. Nobody can be perceived as weak. I’m not saying what Trump is doing is good or bad - I’m observing that he, Xi Jinping, and other political leaders - are now all engaged in a huge flex off that nobody can afford to lose. They are all posturing for their home crowds.
But this, too, is quite analogous to the TOA period. Eventually, a compromise emerged. If I were a betting man, I would say that compromise emerges here and that everybody saves face.
For now, we (the royal we) are along for the ride. My suggestion to myself and others is to be conservative and not take the wild sentiment swings in either direction. Remember - politicians and media on the right have a vested interest in arguing that this is so great for America. In contrast, politicians and media on the left have a similar vantage point that this is so bad for America. That’s not really unusual at all, even from a modern-day context. The answer probably lies somewhere in between.
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