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Protectionism: from Bismarck to Trump

March 26, 2018

Europeans are still taking in the reality of a trade dispute with the US. Yet, economic historian Werner Abelshauser tells DW the topic should not be overly dramatized, not least because protective tariffs can be useful.

Otto von Bismarck
Image: picture-alliance/dpa

DW: Many countries have in the past resorted to imposing tariffs as a protective trade measure. In the US, for instance, shortly after the Wall Street Crash, the Smoot-Hawley Tariff Act came into effect and severe tariffs were placed on hundreds of items. What were the consequences?

Werner Abelshauser: The act led to the closure of the American market for countries like Germany, which wanted to overcome the consequences of the global economic crisis by dumping products in other markets. The German chancellor at the time, Heinrich Brüning, had successfully tried for a year to dampen the crisis in Germany with the help of foreign trade. This was at the expense of the countries that had to cope with the German export surpluses — and then the US put a stop to that.

Read more: Trade wars and real wars: another perspective on the world economy

We are not experiencing a global economic crisis at present. However, the huge protective wall of tariffs, which the Americans erected in 1930, resulted from a populist wave, which is comparable to the situation today. At the time, it was neither the president nor the establishment that came up with this measure, but rather it was the backbenchers in Congress who stood up against the government.

Werner Abelshauser
Economic historian Werner AbelshauserImage: picture-alliance/dpa

But these tariffs do not seem to have worked. In many American textbooks, the Smoot-Hawley law is cited as a prime example of protectionism not working. The tariff increases are said to have intensified the Great Depression of the 1930s.

The global economic crisis of the early 1930s began from the world's capital markets. There was little customs tariffs could do to resolve the situation, except to give a sense of assurance for people. The populist pressure encouraged then US President Franklin D. Roosevelt to announce the "New Deal," which turned out to be an effective strategy against the global economic crisis.

Let's take a look at Germany. In 1878/79, Chancellor Bismarck introduced high protective tariffs. What were his reasons?

This is an example that really bears comparison with today. The second half of the 19th century was a period of globalization, and Germany was one of the winners. During this time, large-scale chemical, mechanical engineering and electrical engineering prospered and companies such as BASF and Siemens were founded — high-tech companies that conducted much of their business on the world market.

However, at the same time, globalization meant the loss of markets for the German steel industry and for the largescale farms in the East. About 40 percent of workers in these areas were affected negatively by globalization. Bismarck therefore introduced protective tariffs for these markets. And it worked: the steel industry modernized and agriculture was stabilized.

The comparison with today is obvious — in the US, the big tech industry benefits from globalization, but industries in the areas in between lose out. No country can afford to have a significant proportion of its population suffer. I therefore interpret the protective tariffs as a desperate attempt to influence the effects of globalization on the United States. However, whether the steel industry can recover in the same way it did in Germany, must be doubted.

Infografik Importzölle EU USA Steigerung ENG

Trump's tariff plans were heavily criticized, with the narrative being that protectionism is bad and leads to higher prices and less competition. Yet your example from the Bismarck era suggests it is not quite as simple as that.

Yes, and there are scientific reasons for that. Think of Friedrich List (1789-1846), up to now the most famous German economist. In principle, List was a free trader but he proved that free trade is only good for those who are competitive on the world market. Therefore for Germany, he demanded protective tariffs — but only until such time as Germany was able to compete with Britain, for example. The idea that only the liberal rules of the free trade game apply on the world market is an ideological statement. It may in fact be advisable for a country to introduce protective tariffs in order to bring one's own economy into line with other competitors.

US President Trump often speaks of "reciprocal" tariff rates, that it would be fairer if both sides charged the same tax rates for the same products. If you look at the import tariffs between the EU and the US, there is indeed a bit of disorder. There are thousands of products yet only a quarter of them have the same rates of duty on both sides. How did this chaos come about?

In the second half of the 19th century — a phase of globalization — there were hundreds of bilateral trade agreements in which tariffs were set. This evolved into the GATT (General Agreement on Tariffs and Trade) which has now become the World Trade Organization (WTO). Between 1947 and 1993, there were eight rounds of negotiations in which compromises were made according to the motto "If you raise an inch, then I may also raise an inch".

Infogfrafik Einfuhrzölle USA EU ENG

And there were many conflicts of interest, such as the "chicken war" of 1964. The US economy exported many agricultural products that France desperately wanted to protect its farmers from. Chaos and confusion about tariffs therefore has a long tradition — and also has plenty to do with domestic political interests.

What do you think of Trump's argument that much international trade is unfair to the US economy?

It is not fundamentally wrong but it only applies to certain markets. Take the IT industry on the US west coast. They have advantages in their European markets that cannot simply be balanced out with money. They do very good business here and have so far hardly paid any taxes or duties. So the argument that trade is unfair to the US can also quickly turn in the opposite direction.

With the exception of European steel and aluminum exports, the conflict has been defused for the moment. The EU has threatened countermeasures though and China also wants to react. How likely is it that this will escalate?

I do not think escalation is very likely and I also don't see a threat of a trade war. We last had a trade war during the Cold War, when Western companies were not allowed to ship computers to Russia, for example. But this is not comparable to the situation today. This is not about war, but about negotiating rules.

Dr. Werner Abelshauser is Research Professor of Historical Social Science at the University of Bielefeld and was appointed by the German Ministry of Economics to their independent history commission. He is the author of the book "German Economic History, From 1945 to the present". He is also the co-editor and author of the recently published four-volume work Economic Policy in Germany, 1917-1990.

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Andreas Becker Business editor with a focus on world trade, monetary policy and globalization.