History Of Tariffs: A Guide For Business Leaders

Forbes

3 days ago

Reco McCambry, CEO @ Novae, a black-owned fintech providing greater access to credit, capital & entrepreneurship for underserved communities
This year, tariffs have been a huge topic of conversation in the business world. For some, this presidential administration may be the first time they've heard the word since history class.
Tariffs are government fees charged on imports from certain countries. They've played a crucial role in economics and foreign policy in the past, but from 1947-2024, the U.S. government has maintained average tariff rates on imports of 10% or less.
Why were tariffs much higher in the past, then so low for almost 70 years?
Tariffs In The Early United States
Tariffs have a long history as a political and economic tool. By charging high fees on imports, empires throughout history could influence who their subjects bought goods from and raise money through fee collection. Tariffs could be used to reward or punish foreign governments by increasing or decreasing their market size, and they influenced foreign policy.
For the early United States, tariffs of around 20% to 60% helped fund things like the military and the construction of railroads and canals to allow the U.S. to profit from cross-continental and global trade. High tariffs also made domestic manufacturing more profitable, encouraging industrialization.
Modern economists are split on whether high early tariffs helped to fuel the U.S. industrial revolution. While Korean economist Ha-Joon Chang argues that high tariffs were necessary for countries like the U.S. and Britain to develop domestic industry, American economist Douglas Irwin argues that it's not at all clear that tariffs were a major contributor to the start of U.S. industrialization.
The Effect Of Industrialization
Throughout the 19th century, tariffs rose and fell. As more American factories opened, some still argued that American industry needed protection from foreign competition through tariffs. Others argued that tariffs harmed Americans by raising prices and making it easier for domestic monopolies to practice price fixing.
The Rise Of Income Taxes
In the beginning of the 20th century, high tariffs were promised to business leaders to reduce competition from overseas. Similar tariff protections were promised to the farmers and ranchers.
Income taxes were also implemented as a source of government revenue with the ratification of the 16th Amendment in 1913 and were expanded to fund World War I. These taxes rapidly grew as the U.S. increasingly projected military power overseas, and disasters like financial crashes and the Dust Bowl demanded that the federal government grow to prevent economic collapse and starvation.
Some economists believe tariffs had made the Great Depression worse. Economist Douglas Irwin points out that in 1930, a new act raising tariffs was passed by the federal government; over the next two years, U.S. imports fell by 40%.
After World War I, income taxes became the 'mainstay of federal revenues.' World War II also advanced global and U.S. trade. Very low tariffs became the norm as everyone wanted affordable raw materials and affordable manufactured goods.
This led to an effective merger of foreign and domestic markets. Many U.S.-based businesses built supply chains to include at least some imported parts, materials or equipment; many importers began to pay U.S. labor to do some of the work of completing, packaging and distributing their products.
All of this raises the question: How can businesses plan and build for a potential return of high tariffs?
How Businesses Can Manage Uncertainty
This article is clearly written primarily about U.S. tariff policy, but the advice below can apply to businesses from any country.
After all, it is not only the U.S. that may soon see higher tariffs: Other countries may respond to U.S. tariffs by raising tariffs of their own against U.S.-made goods. It is even possible that increased tariffs from the U.S. will set a tone that other world governments may follow with higher tariffs of their own. All of this means that businesses in every country would be wise to prepare for increased government fees on internationally sourced goods and services.
The surest policy to avoid taking damage from tariffs is to source as many materials and supplies from domestic sources as possible. Finding sources of parts and labor that will not be hit by changes to tariffs is important to future-proofing one's supply chain.
Unfortunately, working with domestic manufacturers and service providers alone may not be sufficient: Many domestic manufacturers and service providers themselves rely on imported parts and services, meaning that their prices may rise rapidly if new tariffs are introduced.
To avoid this complication, ask questions about your suppliers' supply chain. Are all of their parts and labor based domestically, or do their parts and labor cross national borders during the manufacturing process? Do they have a plan for rising tariffs themselves? How do they expect their prices to change if new tariffs are levied against the countries they source from?
If you can't find suppliers who use 100% domestically made parts and labor, look for suppliers where the impact of potential tariffs could be minimized. For example, in some industries, parts may be shipped in and out of neighboring countries more than once during the manufacturing process. In these cases, the effects of tariffs are multiplied: The end price of a product will be increased each time it is shipped back into the U.S., so each step which requires shipping in and out of the country will make the item more expensive.
Look for manufacturers that ship parts into the country as few times as possible, and avoid manufacturers whose process depends on parts and goods crossing the border multiple times.
It may also be worth looking into government contracts for your business. Government contractors are sometimes exempted from tariff fees, which could provide a tariff-free revenue stream to add to your portfolio.
It is difficult to optimize in uncertain times: Working with all-domestic manufacturers may mean that your costs of goods and services rise somewhat, reducing your profit margin. But having all-domestic options already researched and ready to go may prove a lifesaver if you need to pivot quickly in the face of high tariffs.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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