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 16th 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.
