I wanted to touch on the subject of tariffs for a few reasons. There seems to be growing support for this bad economic policy, by people supporting Trump, and many others and such. Trump, if you remember back in the campaign, promised to raise import tariff’s on imported goods from countries like China and Mexico to offset our Trade Deficit (this is the cost of imports being greater than the value of its exports).
Now, opposition to increasing tariffs is growing. For example, the House Freedom Caucus is already opposed to the tariff deal:
“I think, in general, most of our members would be against tariffs S[and] would not support that,” the North Carolina Republican [Mark Meadows (R-NC)] said on CNN. “That’s why you have two different branches — an executive branch and [a] legislative branch. We’ve got to work together to make sure that jobs are [a] priority, and I think that you’ll find that in the first 200 days.”
But unfortunately, the HFC does not speak for everyone, especially when it comes to tariffs.
We are told by supporters of a tariff that imposing a tariff would shift buying trends and such to buy more American products and less foreign made products. We are told that a tariff will help increase exports and will fuel American trade with the world, by putting Americans back to work with companies bringing manufacturing jobs back to the United States. While this sounds nice and full of rainbows, it’s pure fantasy.
Tariffs have been used in America before, and the effects are usually not something that any politician or President would want to take credit for, let alone any economist, business-leader, or consumer would want to deal with. But Trump is bringing it back in style, trying to dress it up as a good thing, almost mirroring Reed Smoot from back in the 1930’s with his tariff.
Smoot wanted a tariff back after the recession now known today as the Great Depression began, as a way to help reduce foreign competition with American producers. And to be truthful, he got his wish: at a cost. Smoot was a protectionist and nationalist, much to what Trump is appealing towards today. However, we can already see the effects of Smoot’s work. As Selwyn Parker writes over at CapX:
Although historical economists still differ about the extent of the damage caused by Smoot-Hawley, nobody doubts that it dealt a serious blow to the global economy at a vulnerable time – or that it deepened and lengthened the Depression, both inside and outside the United States.
Between 1929 and 1933, US imports collapsed by 66 per cent. Exports plummeted by 61 per cent. Total global trade fell by a similar amount.
As the Depression worsened, the deflating US economy was hit ever harder by the Smoot-Hawley tariffs. Because the tariffs were fixed, the dutiable percentage of products grew as their value collapsed. The less trade there was, the more difficult it became.
But I find it more necessary to break down a few areas that the tariff really effected. Trump is talking about bringing back jobs in areas like manufacturing and car manufacturing. I used to live in Michigan, just south of Detroit. I can tell you all about how car manufacturing is disappearing all around the Mid-West. I can understand how threatening and imposing a tariff on imported cars and such may keep companies here, but you still have to understand that this is no solution to promoting economic growth. Still using the Smoot-Hawley Act of 1930, the effects were visible in these areas:
The tariff dramatically lowered U.S. exports, from $7 billion in 1929 to $2.4 billion in 1932, and a large portion of U.S. exports were agricultural; therefore it cannot be assumed that the microeconomic inefficiencies were evenly distributed. Many individual states suffered severe drops in farm incomes due to collapsing export markets arising from foreign retaliation, and it’s no coincidence that rural farm banks in the Midwest and southern states began failing by the thousands.
Agriculture was not the only export sector destroyed by the tariff. The worldwide retaliation against U.S. minerals greatly depressed income in mining states and can be partially blamed for the collapse of the Wingfield chain of banks (about one-third of the banks in Nevada, with 65 percent of all deposits and 75 percent of commercial loans). U.S. iron and steel exports decreased 85.5 percent by 1932 due to retaliation by Canada. The cumulative decrease in those exports below their pre-tariff levels totaled $369 million. Is it any wonder that Pittsburgh saw 11 of its largest banks, with $67 million in deposits, close in September 1931?
How about U.S.-made automobiles? European retaliation raised tariffs so high that U.S. exports declined from $541 million per year to $97 million by 1933, an 82 percent drop! Thus there was a cumulative export decline of $1.57 billion from the pre-tariff volume to 1933. Is it any wonder that the Detroit banking system (tied to the auto industry) was in complete collapse by early 1933?
The effects of the tariff were felt all-throughout the country in every sector. The tariff worsened the Great Depression. Yet, Smoot was all supportive of it to his dying day, believing he had still done the right thing.
Fast-forward to the early 2000’s, when President George W. Bush signed into law a new tariff on foreign steel. The rate was set as high as 30%, significantly increasing the price of steel. Many thought that this would protect American consumers of steel and American steel producers, as well as consumers.
The results are well summed-up in this Congressional Report from 2002:
- Some steel using manufacturers are caught in a price/cost squeeze. While the tariffs on foreign steel products were raised to 30 percent, many small manufacturers have seen price increases on domestic steel rise even higher to 70 and 80 percent.
- Some steel using manufacturers are subject to arbitrary allocations and shortages from steel manufacturers. They may be able to pay the higher prices, but the U.S. steel manufacturer cannot produce enough steel to meet demand. They have no assurance of a supply of steel beyond this month.
- Some steel using manufacturers assert that the recent increase in the price of steel has made them uncompetitive as compared to their overseas rival. They have lost sales of foreign companies that can purchase steel at
world market prices. These foreign companies not only purchase steel at world market prices and make the products overseas, but they export the finished good into the U.S. at a lower tariff rate.
- Some steel using manufacturers lament that they have had to lay off a number of workers over the past four months because the high price of steel has not made them competitive. Many predict more layoffs by the fall unless the
price of steel drops.
- Some steel manufacturers complain about big steel manufacturers breaking existing contracts to arbitrarily raise prices. As they are unable to break their own contracts with their customers based on a higher steel price, the small manufacturers get caught in a vice.
Another report, done by the CITAC Foundation, came to similar conclusions:
- Every U.S. state experienced employment losses from higher steel costs, with the highest losses occurring in California (19,392 jobs lost), Texas (15,826 jobs lost), Ohio (10,553 jobs lost), Michigan (9,829 jobs lost), Illinois (9,621 jobs lost), Pennsylvania (8,400 jobs lost), New York (8,901 jobs lost) and Florida (8,370 jobs lost). Sixteen states lost at least 4,500 steel consuming jobs each over the course of 2002 from higher steel prices.
- While insufficient data exist at this time to measure the precise role steel tariffs played in causing such significant price increases, relative to the other factors, it is clear that the Section 201 tariffs played a leading role in pushing prices up. Steel tariffs caused shortages of imported product and put U.S. manufacturers of steel-containing products at a disadvantage relative to their foreign competitors. In the absence of the tariffs, the damage to steel consuming employment would have been significantly less than it was in 2002.
- The analysis shows that American steel consumers have borne heavy costs from higher steel prices caused by shortages, tariffs and trade remedy duties, among other factors. Some customers of steel consumers have moved sourcing offshore as U.S. producers of steel-containing products became less reliable and more expensive. Other customers refused to accept higher prices from their suppliers and forced them to absorb the higher steel costs, which put many in a precarious (or worse) financial condition. The impact on steel-consuming industries has been significant.
Now we are confronted by the possibility of more tariffs again in our lifetime. Sources near Reince Priebus, who was tapped by the Trump Transition Team to become a high-level consultant to the President, say that the incoming Administration is floating a 5% tax on all imports, while others are beginning to say the rate will be 10%. The scary part is that Trump could do it all on his own if he wanted to, since the President (somehow) has the power to increase tariffs on his own.
We have seen the effects of tariffs, from many years ago to just recently. Tariffs do not work the way people often envision they should. Reality is not nice to people favoring tariffs, or those who stand to be effected by them. Ask Americans who used to work in steel before they lost their jobs how the tariff protected them.
For a closing thought, I will leave you with a good quote by the great economist Henry Hazlitt, on the subject of tariffs, and what they do: