If Trump is to be successful as regards tariffs, he must look at President William McKinley’s successes and mistakes.

As a young, struggling congressman, William McKinley’s friend President Rutherford Hayes told him to specialize and develop expertise in tariff policy. McKinley's first legislative effort as a congressman was to increase tariffs in 1877. McKinley rose quickly to chair of the Ways and Means Committee. McKinley was instrumental in forming a Tariff Commission and became a framer of the 1882 Tariff Bill.

His chairmanship led to the passage of the famous "McKinley" Tariff Act of 1890. The Tariff of 1890 went too far and lacked the appropriate guardrails to address inflation and potential trade wars. The 1890 Tariff roughly added a 50% tariff on all manufacturing imports. McKinley’s colleagues overruled him, following the model of tariffs as revenue producers versus McKinley’s model of protectionism for American industry. The short-term adverse effects and political impact cost McKinley and many other Republicans their seats two years later.

McKinley's return to Congress in 1896 would be the forge for America's first voting alliance of workingmen and manufacturing capitalists, which won him the White House twice.  

The era of McKinley tariff protection lasted from 1880 to 1920. In 1880, the American steel industry struggled to expand against British steel's supremacy but flourished under the McKinley tariffs. Steel production went from 1.3 million tons in 1880 to 11.2 million tons in 1900 to 28.3 million tons in 1910. In 1898, the American steel industry surpassed Britain in pig iron production. The U.S. gross national product grew from an estimated $11 billion in 1880 to $18.7 billion in 1890 to $35.3 billion in 1910. The American glass industry was another struggling industry in 1880 due to imports. By 1910, the McKinley tariffs reversed the trend, and the glass industry had increased its output five to tenfold. During the peak tariff years of 1896 to 1901 under President McKinley, steel production increased 111%, electrical equipment production increased 271%, and farm equipment increased 149%. During the same period, wages increased by 10% and employment by 20%. Even more impressive to free traders, prices fell as productivity and innovation mushroomed. Macro and microeconomic data of the period continue to be debated, but McKinley won the working-class dinner table.

LESSONS LEARNED

Patience

An example of McKinley’s short-term failure and long-term success was tinplate. England had destroyed American tinplate production and controlled the market at the time. Tinplate household items and canned products were essential to American farmers and the frontier.

In the short run, the McKinley tariffs did increase the price of tinplate with the 1890 Tariff Act. The Republicans lost Congress and the presidency in a landslide in 1892, with McKinley losing his seat. The goal, of course, in the long run, was to develop the American infant industries such as tinplate. The high price spurred exploration for tin and increased American investment in tinplate and canning. Before 1890, there were a handful of tinplate manufacturers in the United States, but by 1893, 200 mills produced 13,000,000 pounds of tinplate. The cost of tinplate dropped dramatically by 1895 as the McKinley tariffs created a competitive domestic tinplate industry, putting profits back into the business. It was a harsh lesson of the market and domestic production lagging.

Short-term tariffs can increase prices depending on many factors, but there are ways to address that issue. Trump has no time to waste; based on McKinley’s success, we are looking at three to four years and, in some industries, longer.

Reciprocity and Trade Wars

Reciprocity was central to McKinley’s plan, based on fairness. This trade fairness destroys the drive for retaliation and trade wars. McKinley used reciprocity to pacify free traders. Most importantly, it builds public support. The public’s ability to accept some pain in the short run requires the McKinley idea of tariff reciprocity. Unilateral tariff-free trade can lower prices but comes with lost jobs and wages in the short range.

McKinley’s reciprocity approach was based on a product versus a national approach. Tariffs at the national level are simple to implement but lack fairness or at least a perceived fairness. Reciprocal tariffs on products shipped to products received are hard to argue with.

Forcing Domestic Investment

McKinley used a congressional regulatory committee to help limit the free traders’ opposition, assuring fairness and that companies invested in jobs, not filling their pockets. Big companies were routinely called into question about tariff benefits and investment.

Reparations for Those Unfairly Hurt

One of McKinley’s tariff failures was his inability to address fairness and trade war attacks on specific voter segments. In particular, the farmers of the McKinley era were hurt by the higher cost of goods and equipment. McKinley tried to absorb the voter blowback, but it initially cost the Republicans many seats. Trump’s first term addressed this with success. He used the tariff revenue to support the farmers. Competitors and political opposition will look to target specific voting segments in democracies. Tariff revenues offer the necessary defense to help those unfairly caught in the warfare and must be used as such.

Infant Industries and Product Focus.

Creating jobs quickly is difficult, but it is key to success. In the McKinley era, low-cost German pickles dominated the United States. McKinley put a 40 percent tax on pickles and made H. J. Heinz a major employer in the nation. McKinley’s ability to develop an American tin plate was more typical, being in the three to four-year range.

Flexibility, Review, and “Cutouts”

Tariffs can cause unintended consequences and domestic market disruptions that must be addressed quickly to avoid hurting American industries. A Tariff Commission was developed to constantly review specific product tariffs, industry profits, and jobs.

The situation is much more complicated today, with auto and steel product supply chains moving products and components back and forth across countries. Problems and cutouts must be addressed quickly.

A Strong Business Environment

McKinley had a strong business tailwind to handle the short-term possible price increases. Everything must be done to encourage growth. McKinley’s era was generally favorable because there were no individual or corporate income taxes.

Trump will need tax cuts, reduced regulation, foreign investment, and increased oil production to build a strong domestic economic foundation.

Another international tool McKinley didn’t have to address is currency manipulation and foreign government intervention in industry, which can be used to modify tariff policy. These ancillary factors favor non-democratic and authoritarian governments that can apply the full force of a united national policy.

McKinley showed that protective tariffs can strengthen American manufacturing, but it is a longer-term strategy. To sustain the policy, moderate short-term pain, and maintain public support requires flexibility to address unintended consequences, overview to assure profits are going to jobs, helping those hurt in the short run, routine review of product and market outcomes, and finally, making the cutouts and adjustments as needed.

Image: Library of Congress