What's All This About Tariffs?

First, some history 'cause that's what I do.

       Before the Civil War, the federal government obtained close to ninety percent of its revenue from tariffs, and because of this, the government avoided income taxation. Until the passage of the 16^th amendment and for some years thereafter, tariffs and excise taxes were the principal source of government operating revenues, about 95 % being from tariffs.

        In fact, it can be argued, and has been, that one of Lincoln’s primary reasons for insisting the Union remain undivided was the prospective loss of tariff revenue if ports such as Norfolk, Charleston, Wilmington (N.C,) and most of all New Orleans were no longer “In” the US. There are conflicting numbers (based on who you read) for how much tariff revenue was collected in “the South.” Walter Williams claims 75%, a demonstrably incorrect figure. Others claim as low as just under 33%.  The truth is we don’t know “by the numbers,” but Lincoln almost certainly understood that, while the Port of New York collected about 2/3 (65.9%) of all US tariff revenues in fiscal 1859, many of those imports then being off loaded in NYC and shipped South, would simply shift to Southern ports if a free Confederacy was established.

         As a reasonable man, Lincoln would have certainly understood that the federal budget would have lost, at a minimum, half its operating revenue. This doesn’t even consider the loss of monetary influx due to cotton exports, which was spent on both European imports and Northern manufactured goods. It also fails to factor in that a free Confederacy as, essentially, a new Southern Nation, would have been free to impose tariffs on imports from the North as well as jack up cotton prices to the burgeoning New England textile industry, which was buying cotton, making cloth and selling it back at much higher prices per pound.

“Historical effect of tariffs?”  (From the Cato institute, Libertarian/Right bias!)

“Turn-of-the-Century Tariffs"

In the election of 1888, Republicans called for tariffs to protect American manufacturing. (sound familiar?)  Benjamin Harrison’s defeat of Democrat free trader Grover Cleveland led to passage of the McKinley tariff in 1890. An interesting aspect of the 1890 debate over the tariff is that protectionists abandoned any pretense that high tariffs were needed to protect infant industries. Even mature industries, they argued, needed protection. They further argued that high tariffs were needed “to reduce the Treasury’s surplus.” (Say What? Yep, Treasury surplus!)  They understood that sufficiently high rates would so discourage imports that tariff revenues would fall.

        Protectionist tariffs would remain the bedrock of economic policy of the Republican Party for the next 20 years. Indeed, Republicans were so intent on passing the Payne-Aldrich tariff in 1909 that (Republican) President William Howard Taft supported the 16th Amendment to the U.S. Constitution creating a federal income tax as the political price for Democratic support of the tariff. That has to have been one of the worst deals in history — a lose-lose situation if ever there was one.” (Ed. Note: remember this is from a Libertarian source)

        “The Underwood tariff of 1913 passed early in the administration of President Woodrow Wilson, liberalized trade somewhat. But as soon as the Republicans reassumed power after World War I, they raised tariffs again. The Fordney-McCumber tariff of 1922 generally increased tariff rates across the board. However, it also gave the President power to raise or lower existing tariffs by 50 percent. (yeah, might want to rethink that one!) My rationale for that statement is based on the Constitutional proviso that all bills to raise revenue must originate in the US House. While the "Trump Tariffs" may not have money raising as the primary objective, it is certainly an end result. 

Deepening Depression

The infamous Smoot-Hawley tariff of 1930 was the last outrage inflicted by the Republican protectionists. Rates on dutiable imports rose to their highest levels in over 100 years. Increases of 50 percent were common and some rates went up 100 percent. Table 1 (a “bar” graph, omitted here) indicates how much tariffs increased during the 1920s because of both the Fordney-McCumber and Smoot-Hawley tariffs. A recent analysis estimates that the Smoot-Hawley tariff, on average, doubled the tariffs over those in the Underwood Act.”

Me again: While economists and historians continue to debate how important the Smoot-Hawley tariff was in causing the Great Depression. They are only discussing degree, not reality. Whatever the extent of the tariff’s causative effect, that effect certainly was adverse, and the tariff was certainly bad policy. As figures from multiple sources indicate, world trade virtually collapsed following passage of the Smoot-Hawley tariff. Thus, if that tariff was not the single cause of the Great Depression, it certainly made a bad situation worse.

        So, that’s history, but is it relevant today and will somehow the “Trump Tariffs,” enacted without recourse to, or consultation with, the legislative branch of our government, have a different effect? Below is what the economist wonks at the Harvard Business Review think.

        “A dangerous imbalance between U.S. production and spending since 1981 has produced the mushrooming trade deficit; only a reversal of this imbalance can close the gap. How the United States chooses to accomplish this reversal is perhaps the most important economic policy matter facing our nation in the years just ahead.

        Advocates of protection rest their case mainly on two premises. (ed: The case “for” protectionism, somewhat abridged for space considerations but meaning unaltered:)”

        First is the commonsense notion that high-wage countries like the United States cannot compete with low-wage countries…… Korean companies can always underprice U.S. companies. In free trade between such countries, workers in the high-wage economy face two disastrous options: unemployment or slave-level wages.

       Second is the “unlevel playing field” argument – that the competitive, open environment assumed by international trade economists simply doesn’t exist. While the United States plays by the rules of the free market, foreign governments support targeted industries with subsidies, selective procurement, and trade protection.

       The proper response to these problems seems clear: America should abandon the view that market forces dominate trade flows. It should act like other countries and manage trade to its advantage. Foreign imports should be strictly controlled with quotas until and unless foreign wage levels and industrial policies resemble those of the United States. Unless we protect our markets, the trade deficit will balloon even more and our manufacturing base will continue to shrink.

Fundamental truths

We (HBR) share with the new protectionists a deep concern over the record trade deficit but firmly reject their diagnosis of America’s trade problems, on these grounds:

        Since wage levels tend to reflect productivity levels, the truth is that the United States, like other high-wage countries, can compete with low-wage countries because its superior productivity compensates for higher wage rates. If developing countries had our skills, technology, and capital levels, their wages wouldn’t be so low. (Ed. note: This was truer 20 years ago than now, largely because US companies willingly exported manufacturing tech offshore)

The unlevel playing field argument evaporates before the facts: since 1981, when the United States last enjoyed a surplus in the trade of manufactured goods, the levels of protection have not changed much (except in the United States, where it has gone up). As for Japan, reputedly our most unfair trading partner, then, its proportion of the U.S. trade deficit hardly grew at all from 1981 to 1985.

Protectionists usually make their claims in terms of saving particular industries from imports, as with shoes, lumber, and steel pipe. Historically, however, the facts show that tariffs and quotas seldom save jobs for long or preserve the competitiveness of the industry to be “saved.” Meanwhile, of course, the consumer suffers through higher prices.

        While subsidies, tariffs, and similar practices affect the mix of trade over the medium run, they do not affect the trade balance, which is driven by a nation’s spending and saving patterns. A country with investment opportunities exceeding its domestic savings will borrow from abroad and run a trade deficit even if its costs are relatively low, its home markets protected, and its exports subsidized. Conversely, a nation with high savings relative to investment will run a trade surplus even if its markets are open and its products sell poorly. The recent deterioration in the U.S. trade position resulted from the decline in net national saving when the growing budget deficit far outstripped any increase in net private saving.

         It is unfortunate, if understandable, that these fundamental truths get little support in today’s environment. In this article we demonstrate the logic and empirical evidence behind them and expose other shaky arguments for protection offered over the years.” (A long and scholarly article follows)

I close with this: “Trump’s plans–whatever they may be, and nobody knows what they are, not even, or perhaps especially, not him–have nothing to do with past successful episodes of the right kind of tariffs as part of a pro-growth or pro-opportunity industrial policy mix.”

Professor of Economics J. Bradford DeLong, U.C. Berkeley  

Appendix:

Below are quotes from the last eight American presidents related to free trade and or tariffs. I find it interesting that one of the more critical comments is from the last Democrat, not a Republican.

John Kennedy   

“Economic isolation incompatible with political leadership”

Lyndon Johnson

Johnson was apparently so busy dowsing Vietnam with Agent Orange that he had little to say on economics other than “Damn that’s a big deficit”

Richard Nixon

“Tariffs are just another entitlement that saps incentive”

Gerald Ford

Proponent of free trade, even with Japanese export pressure

Jimmy Carter

Advocated fair and balanced agreements lowering the barriers to trade

Ronald Reagan (Trump's idol, but a committed free trader!

1985: Vetoed import tariffs on textile goods

1985: Articulated goal of Western Hemisphere free trade, (actually proposed concept behind NAFTA in 1979)

George W. Bush 41

“Make Americas a zone of peace, free trade, and democracy”

For NAFTA because exports critical to economy

Bill Clinton

“Our tariff reductions were largest tax cut in world history.”

Data point: NAFTA increased exports to Mexico by 11%

Fair trade will liberalize China (jury still out)

Bush 43

“Free market provides fairest way to allocate resources”

Tariffs over free trade, for steel industry/20 months later repeals steel tariffs he imposed in 2002  (Bush decided in March 2002 to impose tariffs of 8% to 30% on most steel imports from abroad for three years. The decision was heavily influenced by the desire to help the Rust Belt states, but the departure from Bush’s free-trade principles drew fierce criticism from his conservative supporters. After a blast of international opposition, the administration began approving exemptions.

Barack Obama

“NAFTA needs to be amended”

Supports trade & globalization but opposes CAFTA (Central America Free Trade Agreement) job losses.