That’s the subject of my latest column for Bloomberg, with a big help from Doug Irwin. Here is one episode:
In 1971, President Richard Nixon imposed a 10% tariff on foreign goods imported into the US, and kept it in place for four months. The best that can be said about this experience, well documented by Dartmouth economist Douglas A. Irwin in a 2012 essay, is that the US economy survived it.
That’s hardly good news, but it’s partial comfort. At the time, Republican officials wanted an end to non-core foreign currencies, better management of US trade and more spending on defense by US allies. (Sound familiar?) However, after this rhetoric and policy, came an era of trade liberalization. Protectionist spending and incentives for free trade soon proved too strong, and successive presidents of both parties looked to tax cuts.
In 1971, Nixon’s main demand was clear: Countries needed to let their currencies rise against the US dollar. The goal was to weaken the dollar in terms and thereby help US exports.
And these important points:
After imposing the tax, and much negotiation, the US got something tangible in return: Many countries allowed their currencies to float against the dollar – mainly the yen, the mark and the franc. Those measures then led to the widespread collapse of the Bretton Woods system of fixed exchange rates, and accelerated the arrival of floating exchange rates with the Smithsonian Agreement of December 1971.
Trump has no equally concrete demands for US trading partners. Nixon’s need to allow exchange rates to float was something that could happen immediately and was fully transparent. And it was almost impossible to go back. Once that happens, the US can remove the import duty. Other demands of the time – better treatment for US exports and more burden-sharing for protection – were ignored, as such long-term and difficult-to-define changes are too difficult to negotiate.
Recommended.
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