Hu Yu-Hui: Reciprocal Tariffs and the “Golden Age” of the United States

On April 2, 2025, President Trump of the United States announced the full implementation of the reciprocal tariff policy, dubbing it “Liberation Day” for the United States. This policy aims to reshape the U.S. economic landscape by imposing import tariffs equal to the tax rates faced by U.S. export goods on global trading partners, in an effort to reduce trade deficits and revitalize American manufacturing.

President Trump’s vision is to restore the “Golden Age” of the late 19th to early 20th century when the U.S. economy flourished. His supporters believe that this move will help the U.S. regain economic initiative and revive its past glory.

President Trump’s reciprocal tariff policy is often linked by his supporters to the prosperous period of the U.S. economy from the late 19th to early 20th century. It was a crucial stage when the U.S. transitioned from an agricultural economy to an industrial power, with tariffs playing a significant role in supporting domestic industries.

From the Morrill Tariff Act of 1861 to the McKinley Tariff Act of 1890, the U.S. imposed tariffs as high as 40% to 50% on imported goods. This high tariff trade protection policy not only safeguarded nascent industries like steel and textiles but also fostered industries that were previously non-existent domestically, playing a key role in U.S. competition against industrialized nations like Britain.

By 1900, the U.S. had transformed from a primarily agrarian nation with limited industrialization in the 1860s to a technological and manufacturing powerhouse, surpassing Britain to become the world’s largest economy. This period was known as the “Golden Age” of the United States.

The success during this period was not solely due to tariffs. Factors such as America’s abundant natural resources, massive immigrant labor force (around 25 million immigrants were admitted from the late 19th to early 20th century), technological advancements like the widespread use of railways and electricity, and a vast domestic market, all played crucial roles.

Furthermore, the level of globalization was much lower during that time, with international trade accounting for only 5% to 7% of the U.S. GDP, limiting the impact of tariffs on domestic prices, and the federal government relied heavily on tariff revenue. In 1890, federal government expenditures accounted for only about 3% of GDP, with tariffs making up over 90% of federal revenue.

Today, the economic and political realities of the U.S. are vastly different from the late 19th century. The current era is characterized by deep globalization integration, a dominance of the services and high-tech sectors in the U.S. industrial structure, and a substantial federal government apparatus, with government spending representing over 20% of the GDP.

President Trump upholding the “Golden Age” as a policy benchmark, seeks to recreate the economic self-sufficiency and industrial dominance of that era through reciprocal tariffs. This requires a profound restructuring of the current U.S. industrial structure and a reduction in the size of the federal government, ushering in a return to a smaller government era. Both the economic structure and the political system are seen by outsiders as undergoing a significant transformation unseen in the past century of America’s founding.

President Trump’s reciprocal tariff policy is centered around “fair trade,” targeting countries that impose high tariffs on U.S. goods or erect non-tariff barriers, and implementing reciprocal measures. The specific goals include:

1. Reducing trade deficits: In 2023, the U.S. goods trade deficit exceeded $1 trillion, which Trump sees as America being on the losing end of globalization. Reciprocal tariffs aim to raise import costs, reduce import volumes, and shrink the trade deficit.

2. Reshoring manufacturing: By increasing the prices of imported goods, incentivizing companies to relocate production back to the U.S., reviving the industrial foundations of areas like the “Rust Belt” (e.g., Pennsylvania, Michigan), and creating job opportunities.

3. Increasing fiscal revenue: Trump has repeatedly claimed that tariffs would generate “tens of billions of dollars” in revenue, to be used for tax cuts or subsidies (e.g., childcare), mirroring the tariff-supported treasury model from the 19th century.

The White House trade advisor Navarro stated that merely automobile tariffs could potentially bring in $100 billion in annual tax revenue for the U.S., with other goods contributing an additional $600 billion, estimating a cumulative revenue of $6 trillion within 10 years.

Economic sovereignty and negotiation leverage: Reciprocal tariffs are viewed as a tool to reshape global trade rules, forcing trading partners to lower barriers to American goods, thereby restoring U.S. economic dominance.

President Trump’s implementation of reciprocal tariffs to emulate the “Golden Age” faces at least three major challenges: the potential exacerbation of U.S. inflation due to tariffs, the risk of a global tariff war leading to economic recession, and how to overcome the high labor costs hindering the revival of American manufacturing.

Will tariffs worsen the current inflation situation in the U.S.?

One of the significant objectives of Trump’s tariff policy is to reshore manufacturing to the U.S., a long-term process that might lead to short-term supply shortages exacerbating price pressures. Last month, U.S. inflation has dropped from its peak of 9.1% in 2022 to around 3%, but still surpassing the Federal Reserve’s 2% target. While supply chain constraints have eased, energy and food prices remain unstable, placing the U.S. inflation in a delicate phase, where reciprocal tariffs could introduce a new disruption to inflation.

Economists have made initial estimates on the inflationary effect of tariffs. According to studies from various institutions, a 10% increase in U.S. tariffs could lead to a short-term inflation increase of about 0.4% to 1%. If the average tariff rate rises to 25%, the Consumer Price Index (CPI) may inflate by 1% to 2.5%, potentially elevating the inflation rate from the current 3% to 4% to 5.5%. Even a moderate increase of 1% to 2% could push inflation levels back near the highs of 2022 (6% to 9%), exerting economic and political pressures.

Regarding the relationship between tariffs and inflation, there are divergent views in the market, with some believing that tariffs won’t trigger inflation, as inflation is caused by excess money supply. If tariffs bring manufacturing back to the U.S., attracting more investments and leading to full employment, economic prosperity, adequate goods supply, any resulting inflation would align with the Federal Reserve’s 2% moderate inflation target, constituting a positive effect in economic growth.

Opponents of Trump point to historical lessons like the Smoot-Hawley Tariff Act of 1929, asserting that Trump’s tariffs could spark a global tariff war, leading to trade shrinkage and exacerbating economic recession.

In 1929, the U.S. passed the Smoot-Hawley Tariff Act, imposing an average 40% tariff on over 20,000 imported goods in a bid to protect the domestic economy during the Great Depression. This move triggered a global trade war, prompting retaliatory measures by European countries in the form of increased tariffs on American goods, resulting in a global trade contraction (around 66% decrease in global trade from 1930 to 1933). Following the tariff hike, U.S. exports plummeted significantly, unemployment rates surged, further worsening the Great Depression. Simultaneously, international investment in the U.S. decreased, disrupting capital flows and hastening economic collapse.

Opponents fear that Trump’s tariff policy could repeat the mistakes of 1929, leading to a similar global trade war that further hampers the global economy.

However, Trump’s supporters argue that in the late 1920s, the U.S. faced a global economic crisis, while the current era experiences slow economic growth rather than crisis. The global economy in 2025 is expected to see a slow recovery (3.2%), with U.S. GDP growth reaching 2.5% to 3%, far from the eve of collapse seen in 1929. Reciprocal tariffs might just be a short-term disruption, not enough to trigger a recession.

Furthermore, the ultimate aim of a trade war is to compel concessions from opponents. If the U.S. pressures other countries through tariffs to reduce trade barriers, then the negative impact of tariffs might be offset. The U.S. remains the world’s largest consumer market (comprising around 15% of global imports), and reciprocal tariffs might push trading partners towards compromise (such as lowering tariffs on U.S. goods), avoiding a full-blown trade war.

Supporters believe that by implementing reciprocal tariffs, Trump is not doomed to repeat the mistakes of 1929, but rather to reverse the chronic U.S. disadvantage in global trade, bringing back wealth to the U.S. and fostering a more prosperous economic situation domestically.

The high cost of U.S. labor has long been the biggest obstacle for reshoring manufacturing to the U.S. and remains a significant question mark for the effectiveness of Trump’s tariff implementation in the eyes of outsiders.

According to data from the U.S. Bureau of Labor Statistics (BLS), in 2023, the average hourly wage in U.S. manufacturing was around $25 (including benefits, approximately $35), far higher than many major manufacturing nations. For instance, hourly wages in China’s manufacturing sector are around $6, approximately $2 in Vietnam, and $3 to $4 in Mexico.

This disparity makes the U.S. uncompetitive in labor-intensive industries (such as textiles, electronics assembly). Even in technology-intensive manufacturing industries (e.g., automobile, machinery), U.S. wages still exceed those of Germany (approximately $20 per hour) and Japan (around $15 per hour), weakening the cost advantage of U.S. manufacturing.

Additionally, the U.S. faces issues of labor shortages and aging workforce. In 2023, the U.S. manufacturing industry had around 500,000 job vacancies, partly due to an aging workforce (with an average age over 45) and young individuals being unwilling to undertake blue-collar work. Training new workers requires time and high costs, further driving up actual labor expenses.

Simultaneously, low unemployment rates imply that businesses need to pay higher wages to attract workers, leading to a trending increase in labor costs.

The strength of U.S. labor unions and labor regulations are further disadvantageous factors for the U.S. manufacturing industry. U.S. unions (like the United Auto Workers UAW) advocate for wage increases and benefits, augmenting the burden on businesses. For example, after the UAW strike in 2023, wages at Detroit’s three major auto companies rose by approximately 25%. Furthermore, labor regulations (e.g., overtime pay, minimum wage) also raise operational costs.

Since his first term in office, the Trump administration has been taking more comprehensive measures to revitalize manufacturing, ensuring a true renaissance of the sector.

1. Automation and technological upgrades: Leveraging artificial intelligence, robotics, and advanced manufacturing technology to enhance production efficiency, reduce reliance on high-cost labor.

2. Workforce training and industrial policies: Strengthening vocational education, promoting skill training programs in collaboration with businesses, enabling more Americans to acquire the technical skills needed for high-skilled manufacturing jobs to address labor shortages.

President Trump’s reciprocal tariff policy undoubtedly marks a significant adjustment in U.S. economic policy, aiming to reshape manufacturing, reduce trade deficits, and restore America’s economic dominance. However, compared to the “Golden Age” of the late 19th century, the global economy today has experienced tremendous changes.

While tariff policy may bolster government fiscal revenue in the short term and force trading partners to make concessions, the side effects (such as inflationary pressures, trade retaliation) cannot be ignored. Additionally, the central issues of manufacturing revival—in labor costs and industrial structure—cannot solely be addressed by tariffs but require broader industrial policies and economic reforms.

The ability of reciprocal tariffs to reshape the U.S. economy will depend on how the Trump administration balances short-term political objectives and the reality of long-term industrial transformation. If the U.S. can combine tax incentives, automation technology, educational reforms, and supply chain adjustments, it may be able to forge a new golden age for manufacturing in the 21st century.