 "If history is any guide, Trump's tariffs are recipe for recession")
US President Donald Trump has said that April 2, 2025, the day he rolled out the most sweeping tariffs in nearly a century, would be remembered in history as the day he put America on the path to be wealthy again.
However, if history is any guide, then Trump’s tariffs are set to be a recipe for a disaster.
Trump on Wednesday imposed 10 per cent tariffs on all imports and slapped higher tariffs on a select group of countries . He slapped Vietnam with 46 per cent tariffs, China with 34 per cent tariffs (on top of 20 per cent tariffs already in place), Taiwan with 32 per cent tariffs, India and South Korea with 26 per cent tariffs, and Japan with 24 per cent tariffs. Previously, it had been reported that he wants to raise $6 trillion in revenue per year from tariffs.
Economists and trade experts say that’s not a realistic expectation. What is indeed realistic is recession — or something much worse.
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There is already a template of how things could go wrong. The last time the United States imposed such sweeping tariffs in 1930, they had the opposite of the desired effects and worsened the ongoing Great Depression. Those tariffs led to retaliatory tariffs and triggered what’s now known as the ‘mother of all trade wars’.
Trump may have to freshen up his history lessons
In the latest instance of resorting to falsehoods to justify his policies, Trump claimed on Wednesday that foreign countries had funded the US government for years with tariff payments until 1913 when the US government introduced income tax “for reasons unknown to mankind”.
Referring to the last set to sweeping tariffs in 1930 amid the Great Depression, Trump said that the Great Depression would have never occurred if tariffs were already in place and were never replaced by income tax.
Impact Shorts
More ShortsThere are multiple things wrong with the invocation of this history.
For one, foreign countries have never paid tariffs — and they will not pay tariffs in the future as well. Since before the 2024 election, Trump has peddled the false narrative that foreign countries pay tariffs and his supporters have apparently bought it. But that’s not how it works.
Importers in the United States pay tariffs to the US government. This means that if goods from a country are tariffed at 10 per cent, then the American individual consumer or company importing goods from that country would pay 10 per cent of the goods’ cost in tariffs to the US government. In simple words, tariffs are taxes that US importers pay to the US government on imported goods.
There is more to the story
Secondly, the federal income tax was introduced so that the burden of government revenue is shifted from poor to rich Americans. Under the previous regime, tariffs and sales tax provided the revenue to the US government that disproportionately affected the poor. The income tax regime that was introduced in 1913, at the initiative of then-President William Howard Taft, was progressive that meant that the more you earnt, the more taxes you paid.
Taft was driven by the public outcry that had grown over a tax system that undertaxed the rich and overtaxed the poor, according to the National Constitution Center.
Taft wrote to the Congress to come up with an income tax law to make sure more higher-income people paid taxes and that the US government was not entirely dependent on tariffs and sales tax for revenue. It is clear that there were indeed valid reasons to introduce federal income tax — unlike how Trump put it.
In real history, high tariffs worsened recession
Contrary to what Trump claimed, in real history, high tariffs introduced in 1930 under the Smoot-Hawley Tariff Act worsened the Great Depression.
The Smoot-Hawley Tariff Act was a follow-up to the Fordney-McCumber Act of 1922, which had imposed steep tariffs — as high as 40 per cent in some cases.
In the 1920s, American farmers kept losing margins amid overproduction at home and competition from European farmers who were recovering after the World War I. They sought tariffs as a safeguard against cheaper European imports. Such calls were endorsed by President Herbert Hoover (1929-33).
In 1929, following the stock market crash that triggered the Great Depression, calls for tariffs found newfound strength and the Congress passed the Smoot-Hawley Tariff Act. Hoover signed it into law in 1930. The idea behind those tariffs was to safeguard US businesses and farmers by increasing exports and reducing imports.
The Smoot-Hawley Tariff Act raised tariffs from an average of 40 per cent to 60 per cent on hundreds of goods.
Contrary to its objectives, tariffs led to increase in price of food and other goods. As other countries retaliated with their own tariffs, the United States found itself engaged in a trade war that would go on to have grave consequences not just for the US economy but for the world economy as well.
US exports fell from $7 billion in 1929 to $2.5 billion in 1932 and farm exports fell by a third in the same period. The world trade fell by 65 per cent.
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In a review by US Senate later, it concluded that passing those tariffs were “among the most catastrophic acts in congressional history”.
In 1934, then-President Franklin D Roosevelt started dismantling these tariffs as he got the Reciprocal Trade Agreements Act passed.
The law allowed the president to negotiate tariff reductions without congressional approvals and reach trade deals with other countries. It laid the foundations for the free trade regime that evolved in the coming years.
As a result, tariffs fell from around 60 per cent in 1932 to 13 per cent in 1950 and to under 5 per cent in 1990s, according to CATO Institute.
Is history about to be repeated?
Just like 1930s, Trump’s tariffs are expected to worsen the US economy in the coming days.
Nearly all economic indicators are grim: the consumer sentiment is at a four-year low, inflation is persistently above the target, stock markets have been crashing for weeks, and nearly 1 million people are set to be unemployed as a result of Elon Musk’s mass-firing of government employees and cancellation of various procurements.
Tariffs are almost certain to raise prices. As increased costs will be passed on to consumers, their consumption is expected to fall as a result of lower disposable incomes. With reduced consumption, industrial production is expected to fall, which would in turn reduce business investment.
Moody’s Chief Economist Mark Zandi, who had over the weekend raised the odds of recession this year from 15 per cent to 40 per cent, said after the rollout that there does not appear to be a way for the United States to escape a recession.
“We’ll see over the next few days how our trading partners respond to this. If they are more circumspect and cautious, then we can maybe breathe more easily. But if they retaliate in kind or close to it, I really don’t see how we avoid a recession. These are big tariffs — 25 per cent effective tariff rate,” said Zandi in an interview with NewsNation.
Just like the 1930s, the fundamental objectives of tariffs are expected to fail again. While Trump wants to raise $6 trillion from tariffs, Council of Foreign Relations (CFR) President Michael Froman said that is not likely to happen. He further said that the various objectives outlined so far are at odds with each other.
In an interview with CNBC, Froman said that the administration has said it wants to use tariffs as leverage to make nations reduce tariffs on US products, increase revenue, and reindustrialise the United States.
“You can’t raise $6 trillion in revenue and also reindustrialise America. The revenue is going to come if imports keep coming. The revenue is the least important part. The most important part is the transformation into a manufacturing-based economy,” said Froman.
However, as imports would fall as a result of tariffs, the revenue from those tariffs would also fall, which means that the idea to raise huge funds from imports is not workable.
Economists and trade analysts have warned that stagflation, a condition in which inflation and recession coexist , appears to be on the horizon as well. Ahead of tariffs’ rollout, Yardeni Research on Monday raised the odds of stagflation this year from 35 per cent from 45 per cent.
Louis Navellier, the founder of Navellier & Associates, believes that “classic stagflation trends” have already arrived.
Navellier told MarketWatch, “We’re already seeing inflation before the tariff impact has arrived…On the surface, we have classic stagflation trends of elevated inflation and a slowing economy. The Fed has a problem if these trends continue, with inflation saying hold/raise rates and the economy saying cut.”
Echoing Navellier’s belief, Yardeni President Ed Yardeni flagged faltering manufacturing activity and higher prices paid by purchasing managers and told Yahoo Finance that “the higher inflation part of stagflation is almost a certainty”. He held Trump responsible for the situation.
“It’s really a shame that Trump is so willing to take a wrecking ball to the economy. It has been very resilient over the past three years in the face of the tightening of monetary policy,” said Yardeni.
Separately, Yahoo Finance’s Alexandra Canal noted that data released by the Bureau of Economic Analysis (BEA) last week showed that consumers spent less than forecast and, when combined with weak survey and sentiment readings, this showed that “stagflation cracks are beginning to show up in hard economic data”.
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