TRADE WARSThe Intellectual Origins of Trump’s Economic Policies

By Roger W. Ferguson Jr.

Since assuming office, the Donald Trump administration has announced wide-ranging tariffs to bolster U.S. economic and national security. Most recently, President Trump announced 25 percent tariffs on all steel and aluminum imports and has threatened reciprocal tariffs on other countries. The speed and scale of those announcements have surprised many political commentators.

Although it appears novel, in fact the Trump administration is pursuing an age-old economic policy called import substitution industrialization (ISI). That economic policy is based on a theory that an economy can stimulate growth in its industrial sector using tariffs and numerical quotas on imports to protect domestic “infant industries” from foreign competition. Generally, the high-tariff policy is supported by a policy of subsidies for the industrial sector. Occasionally, the policy of high tariffs is linked to a policy of maintaining a strong currency, making prices attractive for the imported intermediate and capital goods required for industrialization. However, that policy involves risks, as it creates both winners and losers. Additionally, subsidies of domestic industries tend to be controversial, and borrowing extensively to support those policies could pose significant risks.

In many ways, Alexander Hamilton, the first U.S. secretary of the treasury, was the first American practitioner of ISI. In his Report on Manufactures, Hamilton argued for subsidies for nascent industries, moderate tariffs on imports (intended to raise revenue, not limit imports), and the application of new technologies to mature sectors (such as agriculture). Notably, Hamilton expected the resulting vibrancy of the newly industrialized economy to make the young United States a magnet for ambitious immigrants, such as himself.

The related eagerness to adopt new techniques also resulted in a thriving business of industrial espionage, with industrial spies bringing European manufacturing secrets to the United States. Hamilton’s policies were seen, appropriately, as supporting the nascent manufacturing sector but potentially raising prices for the agrarian sector, reducing the flow of high-quality British manufactured goods, and using government funds to subsidize industrialization at the expense of rural development. Consequently, they were originally opposed by those who wanted the United States to remain an agrarian society willing to rely on imported manufactured goods from the United Kingdom.