The early seventies was a time when economic worries and challenges to the US dollar plagued the United States. In a bid to find a solution, the then-President, Richard Nixon, delivered an address on August 15, 1971. He laid out a new economic approach to the economic challenges.
The Economic Approach
A major solution he offered in his plan was an “import surcharge.” A new tariff of 10% across America’s trading relationships. This was to hold up the US business in the face of what he called unfair exchange rates.
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“This import tax is a temporary action; it isn’t directed against any other country. When the unfair treatment ends, the import tax will also end,” Richard Nixon said. The solution proffered was implemented by executive order, but by the end of that year, it was gone.
Renewing the Economic Approach
Former President Donald Trump is campaigning around the country with an idea not too far from Nixon’s. He wants to impose 10% “universal baseline tariffs” on almost all foreign products coming into the country.
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In a recent rally in New Hampshire, Donald Trump said, “I love China, I love everybody, but they can’t take advantage of us.” The episode shows the ties between Trump and Nixon.
Presidential Ties
The ties between Trump and Nixon include a political allegiance that spans their years of separation in the political scene. The two men were seen together at least once and often wrote to each other near the end of Nixon’s life.
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Todd Tucker of the Roosevelt Institute once posted on X saying, “Love it or hate it, like many of Trump’s ideas, the idea of a 10 percent import surcharge comes from things Nixon actually did.”
Nixon’s Plans and Their Outcomes
Here are the other things about Nixon’s plan in 1971 and their outcomes. New limits on the exchange of dollars for gold and a 90-day freeze on prices and wages. These became landmarks in financial history.
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Richard Nixon’s moves on currency ultimately brought in a new period of floating exchange rates. It also ended the so-called Breton Woods international monetary system that has been in operation since World War II.
Negotiating Tactic: Import Surcharge
However, Nixon’s import surcharge may be less remembered today. This is mainly because it wasn’t in place long enough to have a significant economic impact. According to the New York Times, it was stopped after being heavily opposed by the country’s trading partners.
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However, even though it didn’t last long, the plan had a major impact. It seemed to have played a crucial role as a negotiating tactic.
Reevaluating Currencies
At that time, Nixon was focused on Japan. He was trying to pressure the country to negotiate a revaluation of their currency. According to Richard Baldwin of the IMD Business School, it wasn’t just Japan; Germany was also targeted.
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“The United States of America was angry at the Germans for keeping the value of their currency low,” Richard Baldwin explained in an interview.
Effects of Import Tariff Surcharge
Although the import surcharge ended in December 1971 as part of the Smithsonian Agreement among G-10 nations that included significant initial currency wins for the Nixon administration, the surcharge had already forced Germany and Japan to reevaluate their currencies.
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Baldwin, however, warned that there may be fewer off-ramps with Trump’s 10% tariff approach this time, especially since he is fixated on China.
National Rivalry
Baldwin said, “There’s nothing that the Chinese could do that would make us happy with them.” He mentioned that the current rivalry between the two powerful countries is about their financial structures. And also the question of who will be the world’s economic engine in the coming decades.
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Donald Trump is also looking at more aggressive measures aimed at China far beyond what Nixon had for Japan and Germany.
Phasing Out Essential Goods
The present GOP hopeful has publicly talked about an effort to decouple with China in 2025. He also mentioned the efforts to “phase out all Chinese imports of essential goods.” The Washington Post also reported that Trump is privately discussing the likelihood of imposing a flat 60% tariff on all Chinese goods brought into the country.
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“China has become competitive, and that’s what people like Donald Trump are upset about, and there is no cure to that,” Richard Baldwin said.
Solving National Problems
As Trump goes around the country for his campaigns, he often promises to get things solved with China. However, he gives little details on what “the solving” would look like and how long the tariff would be needed. It’s essential to know its duration because there could be major economic consequences if left in place for a long period.
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However, from his campaigns, it seems his tariffs could be in place for the long term.
A Ring Around the Collar of The United States of America
Trump likened the import surcharge to a ring around the collar of the US. He claimed that they would be a bonanza for the US Treasury when businesses are hit with the new tariffs.
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According to the Tax Foundation, the proceeds of the 10% tariffs would be $300 billion annually.
A Populist Tactic
What happened with Nixon’s tariff is evidence of the power of the idea of a tariff to change public opinion.
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The Future Federal Reserve Chair Paul Volcker, who was the Treasury undersecretary for monetary affairs in 1971, later recalled that the import surcharge was thought of as a two-way solution. It was both an essential negotiating tactic and a way to attract public support.
An Underlying Political Goal
The surcharge push was also seen as a way to head off more protectionist impulses that were emerging at the time on Capitol Hill.
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Todd Tucker of the Roosevelt Institute also stated the importance of the tariff hike as a PR tool. He wrote in a 2009 book with Lori Wallach that the increased tariff did nothing to change the US trading balance. He wrote, “However, the underlying political goal had already been achieved. Nixon had established his populist credentials and boosted his poll numbers.
Protecting America
Now, Trump is the one pushing the conversation of protection over many in his party who might be mindful of another round of global tensions.He usually lauds his tariff plan as evidence of how he is the candidate who wants to protect Americans. He says this even as economic studies of the trade wars he undertook during his term suggest mixed results.
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Although his tariffs did protect some US jobs, they came at the cost of higher prices for everyone. Regardless, at a recent rally, Trump declared that his administration would impose stiff penalties.