On April 4, in their Notable and Quotable, the Wall Street Journal published the following excerpt from an April 27, 1978 speech by economist Milton Friedman at Kansas State University:
We call a tariff a protective measure. It does protect; it protects the consumer very well against one thing. It protects the consumer against low prices. . . . [W]hen people talk about a favorable balance of trade, what is that term taken to mean? It’s taken to mean that we export more than we import. But from the point of view of our well-being that’s an unfavorable balance. That means we are sending out more goods and getting fewer in. Each of you in your private household would know better than that. You don’t regard it as a favorable balance when you have to send out more goods to get less coming in. . . .
[I]f you eliminate government from these matters you enable individuals to deal with one another. If you introduce protection, tariffs, restrictions on trade, they become matters for government-to-government wrangling and they are an enormous source of division. So in the name of both prosperity and world peace there are few steps that we could take which would contribute more than a complete move toward free trade.
Milton Friedman was a brilliant, thoughtful economist. However, I would suggest: context, context, context.
First off, this is not 1929. The United States is now quite different, the world is different, everything is different. You have to look at that context. Furthermore, it’s not even 1978, when Friedman’s speech was given and we were coming out of the dreadful economy of 1974 and 1975. So, context… what is the context?
You have to understand who Trump is and what he is. He’s a player, he’s a gamesman, he’s a manager. He’s not a politician (which is probably a strength). He does the deals. He’s shaking things up—I think quite intentionally—and when they come loose, he’s going to make some deals and I think the economy is going to come roaring back. That’s my view. (But please do not invest based on my opinions. 🤣)
Just some thoughts that you might find interesting with all this noise and nonsense about the sky falling. I hope it’s of use to you. I appreciate your comments.
Carl B. Barney
April 7, 2025
One of the arguments against tariffs is that the imposition of the Smoot Hawley tariffs in 1930 led to the great depression.
This might well be true but as you point out context is important.
Before 1916 the tax revenue in the US was almost entirely by tariffs at about 3% of GDP (1).
In 1930 the US had a GDP of $92billion , exported $5.4billion (6% of GDP) and had a positive balance of payments of $1billion (1% of GDP)
The US continued with a positive balance of payments right up to the early 1970’s when the balance went negative where it has remained ever since.
By 2022 the US had GDP of $26trillion, exported $3trillion (11% of GDP) and had a negative balance of payments of $971billion (4% of GDP). (2)(3)
Of course inflation has rocketed since 1930 so the 2022 figures need to be adjusted ($1 [1930] = $17.5 [2022])
Here are the statistics expressed in 1930 dollars (billions):
year GDP exports %GDP balance of payments %GDP
1930 92 5.4 6 1 1
2022 1500 170 11 (55) (4)
In other words the economy has expanded since 1930 by a factor of 16, exports more goods by a factor of 30 but has severely reversed its balance of payments.
I am not good enough at economics to know what the consequences of this drastic change in circumstances will be with regard to tariffs. I am not sure any body else is either. Just wait and see.
(1) https://upload.wikimedia.org/wikipedia/commons/thumb/e/e0/Federal_taxes_by_type.pdf/page1-2760px-Federal_taxes_by_type.pdf.jpg
(2) https://www.macrotrends.net/global-metrics/countries/USA/united-states/trade-balance-deficit
(3) https://www.statista.com/statistics/1031678/gdp-and-real-gdp-united-states-1930-2019/
I think it would be profitable to read Ian Fletcher’s 2011 book on the theoretical issues associated with free trade. He dives deeply into Ricardo’s writing on comparative advantage and discusses the assumptions Ricardo makes (and that Ricardo honestly states in his writings!) and how those assumptions do not apply in today’s world. He then goes into some of the practical considerations of global free trade. There are simple examples to illustrate Fletcher’s point that I will give you if you are interested. But one obvious example is that while free trade will theoretically increase global GDP, it will not necessarily increase US GDP. Free trade has lifted many hundreds of millions of Indians, Chinese, Indonesians, and others out of poverty, while making a few Americans fabulously wealthy beyond the dreams of Croesus. But it has destroyed not only millions of American lives, but whole communities have been laid waste as a result. I’ve seen them in person. The essence of America is these small towns that globalism has destroyed, not the multicultural chaos that is, for example, Brooklyn. Free trade (and mass migration, its cousin) has almost entirely destroyed the American character and experience, just in my lifetime. These two menaces will inevitably change our political system to one of authoritarianism or outright dictatorship if not stopped. Read Fletcher’s book, it’s important.
I just started reading The Trump Economic Miracle by Art Laffer and Stephen Moore. In the introduction, they describe Trump’s efforts with negotiating better trade conditions during his first term. He was mostly rebuffed at every turn. Trading partners saw no reason to modify the current “deal.” So the current “trade war” is (most probably) a means to get trading partners to actually be ready to “make deals”. We may end up with slightly higher tariffs on inbound trade — or not. The extraordinary high tariffs announced (and then suspended) are likely a negotiating ploy, not an ultimate goal. Of course, the interim is going to be rocky until some deals are made and the true nature of the intended outcome becomes clear. (FWIW, during my career, I was an observer and sometimes a participant in the give at take in negotiations of freight rates between rail carrier(s) and customers, as well as negotiations of the “divisions” of such rates between multiple rail carriers required to move particular shipments. It was every bit as complex and nasty as the tariff “trade war.”)
You implied that today’s context makes Trump’s tariffs a good thing, but you didn’t identify that context, nor even begin to say why Trump’s tariffs will be good for us. In fact, they are doing great harm, as tariffs always have. Hardly a day passes without him showing off his ignorance of basic economics. Unfortunately he’s wielding power that the Congress has ceded to the Executive over many decades. I dearly hope congressmen will grow a spine and work to recover that power.
The question is whether he is imposing tariffs and quotas as a weapon to get other countries to reduce theirs, resulting in overall lower tariffs than there were before.
Or whether he wants there to be greater levis or barriers than when the tariff war started.