Economics for Dummies Part One - Tariffs

 

Economics for Dummies, part one: tariffs

        I’m calling this “Economics for Dummies” because we continue to see ludicrous claims about things done by not only the last administration, but by most recent Republican ones. This included some which are so lunatic in nature that Adam Smith himself would have puked had he read them. Most who will actually read this already know better.

        I know, “So who was Adam Smith?”  Adam Smith was a British citizen who wrote and published, in 1776, what is considered by most literate humans to be  the first scholarly and researched book on economics, “An Inquiry into the Nature and Causes of the Wealth of Nations,” generally abbreviated as simply “The Wealth of Nations.”  It is the second most cited book in the social sciences published before 1950, behind Karl Marx's “Das Kapital.”

        To understand economics requires a bit of vocabulary. Smith lived in the period just prior to the American Revolution when economic issues were driving major political disagreements (as in fact they pretty much always have). In this case, it was primarily the American Colonists dissatisfaction with being on the “wrong end” of British Colonial policy, described in economic terms as Mercantilism, or the mercantile “system.” Economics and/or religious factional disputes, in one form or another, were also root causes of the almost constant tension between the colonial nations of Western Europe.  

        Mercantilism, and to large extent, Colonialism, was driven by circumstances primarily unique to long standing European nations which had the need for raw materials to continue industrialization and who were fast consuming those within their own continental boundaries.  A secondary issue was that colonies were regarded primarily as sources of these raw materials and markets for finished goods exported from the “Mother country.” In summary, wealth was supposed to flow from the colonies to the mother country.

        “The Wealth of Nations” attacks a major tenet of mercantilism: The idea that protectionist tariffs serve the economic interests of a nation (or indeed any purpose whatsoever) is disparaged, yet greed prevails.

         Tariffs, lauded and enacted by Trump and regarded as ludicrous by actual credentialed economists, exist principally to make foreign imports more expensive than domestic production, thus assuring domestic manufacturers of an “edge.”  Among his many intellectual failings was the fact that Trump enacted tariffs on some foreign import products not produced, or not at a remotely competitive price, domestically. He compounded this lunacy by insisting that “China will pay the tariffs.”  At this point his Treasury Secretary should have bitch slapped him.

        Trump undoubtedly has never heard of South Carolina's first threat/attempt at secession in 1828. The Tariff of 1828 was a very high protective tariff that became law in the United States in May 1828. It was called the “Tariff of Abominations" by its Southern detractors because of the effects it had on the Southern economy. It set a 38% tax on some imported goods and a 45% tax on certain imported raw materials. The tariff of 1828 raised taxes on imported manufactured goods from Europe. The South was hurt badly by these tariffs, because just as today, US importers added the cost of tariffs to the retail prices. This simply passes the cost of the tariff on to American consumers. Remember, the idea is to make domestic products more attractive to our own consumers. When US manufactures are far more expensive for whatever reason, the import even with tariffs added is still cheaper.

        A simple 1828 example: Shoes made in America at the time were generally produced as one offs in cottage industry settings, and almost exclusively in the North, as the South was cash crop, largely agricultural driven. Meanwhile Northampton alone, in England, had over one thousand shoe and bootmakers.

         A simple math example: Shoes made in New England shipped to Charleston were, let’s say $6 per pair, meanwhile shoes made in England, even with shipping, would sell at the Port of Charleston for $4 per pair. The obvious conclusion is that English shoemakers had an edge over domestic manufacturers, but to the agrarian South Carolinians it was simply a math exercise: “Buy British for 50% less” (and the quality was probably better.)       

     The Tariff of Abominations led to a near bout with secession in the South that could have destroyed the Union 30 years before the Civil War. South Carolina's state legislature actually passed articles of secession. Andrew Jackson publicly threatened the use of Federal Troops to enforce the tariff collection while clandestinely ordering “his men” in Congress to pass a new and much lower tariff bill. Presented with greatly reduced tariffs, S.C. relented. 

        The Trump tariffs do not and cannot “protect” American manufacturers simply because American consumers will still buy Chinese products at Walmart, even if the cost is a bit higher, because they are still either cheaper than such products made in America (if there are any, especially in the area of electronics). The far greater impact is on US manufacturers who “assemble” locally but use imported parts or raw materials such as steel. The importers' cost of Trump's tariffs on imported Chinese steel have simply been passed on to American consumers who buy products made from it in this country. China produces roughly twice as much Steel at lower prices than the US.

     The National Association of manufacturers estimates that the Trump Tariffs have cost the average American household an additional $850 or so each year since their inception, China has borne none of these financial burdens, rather Ford, Black and Decker and a host of others have simply upped their retail prices to cover their added cost due to tariffs.   

        The circumstances driving tariffs have varied with time. In 1776, England, themselves, produced no tea, but they had granted the British East India Company a monopoly on tea imports directly to the American colonies, That didn’t drive colonists to rebel, but the tax imposed on it (in essence a tariff) certainly did. (Can you say Boston Tea Party?) Of course, another issue was that while England granted no real citizenship status to most colonial “possessions,” they had appealed to Colonists as “Englishmen” to support the French and Indian war, promising to pay for it. When that proved impractical, in part due to continuing conflict with several European neighbors, England reneged, imposing “taxes” (really more tariffs) on the colonies. We all know (well, maybe Trump isn’t so sure) how that turned out.

        In fact, since 1776, economists have generally regarded protective tariffs as bad ideas and have proved it several times since in US history. One more example, then I’m done: In the early days of the Great Depression, as the US economy tanked, Congress passed, and Herbert Hoover signed, the Smoot-Hawley Tariff Bill into law. The Smoot-Hawley Act increased tariffs on foreign imports to the U.S. by about 20%. This set off a domino effect of trade wars across the globe that resulted in a 66 percent decline in total world trade from 1929 to 1934.

         Not only did this trade-war environment exacerbate the already lackadaisical economic conditions of the Great Depression, but it also fueled the irrational despotism and militarism that preceded the outbreak of World War II. At least 25 countries responded by increasing their own tariffs on American goods. Global trade plummeted, contributing to the ill effects of the Great Depression. That is the result of economic ignorance and flamboyant efforts to look like a leader. As usual, many of those who supported the Hoover administration were victims of said incompetence. The harsh reality is that tariffs yield clear benefits primarily for the narrow interest groups that promote them.

        Would tariffs ever make sense? Perhaps as an “internal stimulant” to push industrial expansion in a nation with loads of all the natural resources to fuel it. No such developed nation now exists on earth. Raw materials are distributed with no regard to national boundaries. Artificial boundaries such as tariffs are of little use, and as in the case of the Trump tariffs and others before them, actually may well do harm to the larger economy. The annual Trump tariff cost to American households is an aggregate of about $130 billion (nine zeros!)