Notice the Smoot-Hawley Act (1930) marked the peak of U.S. tariffs (~20%) which should provide caution for those in the Trump administration advocating for higher tariffs.  The Tariff Act of 1930, or the Smoot–Hawley Tariff Act, was a law which implemented protectionist trade policies in the U.S. Sponsored by Senator Reed Smoot and Representative Willis C. Hawley, it was signed into law by President Herbert Hoover on June 17, 1930. The Smoot-Hawley Act prompted retaliatory tariffs by U.S. trade partners (sound familiar?) which led to a reduction of U.S. trade by 67% during the Great Depression. Much has been written about this infamous piece of legislation by economists and historians who generally agree this Act contributed to and / or caused the Great Depression of the 1930’s.

History may not repeat, but it often rhymes – why would the U.S. consider implementing similar trade policies to those that contributed to the worst economic depression in modern history? This is a question currently being asked by most economists (including myself). Threatening tariffs doesn’t mean implementing tariffs – we’ll see if Trump’s bark is worse than his bite.

Notice the period of the 1990’s up until the late 2010’s in the chart – this was the golden age of free trade. The Canada-United States Free Trade Agreement (CUSFTA) was signed by Prime Minister Mulroney and President Regan on January 2^nd, 1988. CUSFTA was the precursor to NAFTA which expanded North American free trade to include Mexico in 1994. The 30-year period from the late 1980’s until the late 2010’s was associated with global economic growth, the largest bull market in history and the emergence of China as a superpower. The link between free trade and economic growth has been well established, however, the pendulum has recently swung back towards protectionism and tariffs for several (mostly political) reasons.

Canadian officials (as was the case in 2017) have designed an extensive plan to retaliate against Trump’s proposed tariffs and we are, by far, America’s largest trading partner. Trump believes he is a skilled negotiator – earlier in his career, he wrote a book entitled, “The Art of the Deal”. I sincerely hope Trump’s tariff threats represent a negotiating tactic vs. actual policy. If Trump implements tariffs on the scale he has proposed, a global trade war would likely follow which could have a devastating impact on the global economy. The concept of MAD (Mutually Assured Destruction) may apply if Trump’s team studies history – the last thing Trump wants as a proponent of a strong economy is to cause a deep, prolonged recession caused by a global trade war. Let’s hope history doesn’t repeat and that cooler heads prevail in coming weeks and months.