Tariffs and industry: a historical perspective from the USA

The column returns from its brief foray into electoral politics to return to a subject that is more within the realm of conventional economics, but no less topical. 

The conventional view among economists is that tariffs are almost uniformly bad. The principle is simple: consumers pay higher prices for domestically-produced goods that can be imported for low prices from abroad. All consumers in the economy lose out, and only certain domestic firms gain. The result is a net welfare loss. Tariffs are usually considered to be justifiable only to correct predatory or unfair trading practices by foreign countries, or to ensure the manufacture of goods critical to national security. Both these arguments have been used to justify import duties on products produced in China. In particular, there has been widespread criticism of large state subsidies towards Chinese producers and the “dumping” of goods at below production cost prices on the international market. In this article we consider what role tariffs played in US industrial development, and what future US industrial policy might look like.

Notwithstanding the validity of the economic logic against tariffs, politicians from both right and left continue to support protectionist policies as a means of supporting American industry. The United States is often cited as an example of a country that benefitted significantly from industrial protection during its period of rapid industrialisation between 1865 and WW1. This is something of a misconception.

It is true that the United States adopted a highly protectionist stance, even by the standards of the time. The so-called Morrill Tariff of 1861 increased the effective rate on dutiable imports by around 70% relative to its previous levels. The benefits went almost entirely to Northern industrial centres. The agrarian South, which was heavily reliant on foreign imports, would have lost out significantly. In actual fact, the Confederate states had already seceded from the rest of the US by the time of the law’s enactment so in practice the effects were limited. 

In any case, tariffs provided only temporary price protection for domestic firms. Although the story of how the US developed into the world’s largest economic superpower is a nuanced one, the rapid addition of land (in the form of western expansion) and labour (in the form of high levels of immigration) was crucial. Regardless of the level of protection, steel production in states like Pennsylvania and Ohio was only possible because of the abundance of iron ore in the nearby Allegheny Mountains. 

More important even than resources were economies of scale. By the late 19th century the US had the world’s largest domestic market, which had been recently integrated by the expansion of the railroad network. This meant a guaranteed domestic market for manufacturers of goods like agricultural machinery and textiles. This in turn, supported the mass production of goods and the development of the so-called “American system” of manufacturing, which emphasised large-scale assembly-line style manufacturing that was more cost-effective than anything which had been seen previously.

In the 19th century, as now, tariffs were primarily a political tool. The Republicans behind the Morrill Tariff knew that the greatest economic advantage would go to the Northern states, where their supporters were overwhelmingly concentrated. In the same way, the tariff policy that characterised President Donald Trump’s first term was designed to protect workers in declining manufacturing industries, by imposing tariffs of 25% on steel and 10% on aluminum. Notably, his successor Joe Biden did not reverse these tariffs - evidence that the American left and right are not as divided on trade policy as some might think.

Times have changed significantly. American manufacturing has declined from its peak in the 1970s. Protectionism is now defending so-called “sunset” industries instead of “infant” ones. However, the key logic remains. The benefits accrue to a narrow interest of industrial workers and companies, while consumers bear the burden of higher prices. Tariffs to support uncompetitive industries that are specifically in decline are only delaying the inevitable. This has been especially true of the latest round of general tariffs that have accompanied President Trump’s return to office in 2025. 

If the claim of the first part of this article is that history tells us that tariffs had limited impact on industrial production, it is reasonable to ask how industrial policy might evolve in the coming years. This article does not have all the answers, but highlights a few key points about the future of US industrial policy to be expanded on in a future article.

US manufacturing would almost certainly benefit from becoming leaner. There is no avoiding the fact that some Chinese exports will be more price competitive because the cost of labour is substantially lower in that country. As China was rapidly integrated into the global economy in the late 1990s and early 2000s, US manufacturing jobs inevitably began to decline sharply: from around 18 million in 1998 to less than 14 million on the eve of the financial crisis. Policymakers failed to adequately accommodate this adjustment by re-educating and retraining redundant workers, leaving millions of forgotten individuals and forgotten towns across America’s former industrial heartland.

Future industrial policy should be focussed on education and training. This is an area where the US retains an advantage compared to China. The integration of high-tech AI-powered tools into what remains of the manufacturing system may help alleviate the competitiveness issue. In the 2nd Industrial Revolution, educational advantages allowed for certain nations to take advantage of highly sophisticated new technologies. The same is true in this day and age - AI will be labour-enhancing only if workers are able to use it to enhance production. Otherwise, even more redundancies will follow. One thing is clear: tariffs are only ever a short-term fix, and US industrial policy will need to undergo significant evolution to keep manufacturing competitive in the 21st century.

The views and opinions expressed in this article belong solely to the writer and do not necessarily reflect the views and opinions of the Warwick Economics Summit.

Reference List

1. Clausing, Kimberly, and Maurice Obstfeld. “What Populists Don’t Understand about Tariffs (but Economists Do).” PIIE, October 2024. https://www.piie.com/blogs/realtime-economics/2024/what-populists-dont-understand-about-tariffs-economists-do.

2. Harithas, Barath, Kyle Meng, Evan Brown, and Catharine Mouradian. “‘Liberation Day’ Tariffs Explained.” Csis.org, April 3, 2025. https://www.csis.org/analysis/liberation-day-tariffs-explained.

3. Humanities LibreTexts. “5.1: The First and Second Industrial Revolutions,” July 7, 2022. https://human.libretexts.org/Bookshelves/History/World_History/Modern_World_History%3A_New_Perspectives_(OERI)/05%3A_Economic_Transformation_and_Nation-Building_-_1800-1900/5.01%3A_The_First_and_Second_Industrial_Revolutions.

4. Silver, Katie. “China’s Trade Practices Come under Fire.” bbc.com. BBC News, October 21, 2021. https://bbc.com/news/business-58991339.

5. Stlouisfed.org. “All Employees, Manufacturing,” 2019. https://fred.stlouisfed.org/series/MANEMP.

6. The American Yawp. “8. The Market Revolution | the AMERICAN YAWP.” American Yawp, 2019. https://www.americanyawp.com/text/08-the-market-revolution/.

7. United States Congress. Tariff of 1861 (Morrill Tariff). Fraser.stlouisfed.org, 1861. https://fraser.stlouisfed.org/title/tariff-1861-morrill-tariff-5871.

8. York, Erica, and Alex Durante. “Tracking the Economic Impact of the Trump Tariffs.” Tax Foundation, August 22, 2025. https://taxfoundation.org/research/all/federal/trump-tariffs-trade-war/.