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President Trump, by his own declaration, loves tariffs. In fact, tariff is his “favorite word”. Tariffs purportedly produce funds, “billions and billions, more than anybody has ever seen before,” which can be used for essential spending or to reduce taxes and meanwhile will “bring back jobs”.
The president is all in on his enthusiasms. As matters now stand, he is imposing both universal baseline as well as country-specific tariffs, affecting more than $1 trillion of imports. This compares to the mere $380 billion in tariffs passed in 2018 and 2019 by the first Trump administration but will rise to $1.4 trillion when/if the temporary exemptions for Mexico and Canada expire in April.
There is a logic to tariffs that appeals to those with a protectionist bent. If foreign producers are selling in your country and taking profits — profits that could otherwise be earned by domestic enterprises — why not make the cost of doing business higher for them and keep the profits at home?
Yet the history of tariffs is, to put it kindly, dismal. The 1930 Smoot-Harley tariff is America’s best-known and most instructive experience with protectionism. In 1929, the League of Nations passed a resolution declaring that tariffs were destructive and should be ended by all. When Smoot-Hawley was introduced, Franklin Roosevelt campaigned against it. After the bill passed, 1,028 economists and even some business leaders like Henry Ford urged a veto.
President Hoover termed the measure “vicious, extortionate and obnoxious”. He signed it anyway at the urging of his advisors. Americans, especially the agricultural sector, were facing a perceived problem with overproduction, mainly due to electrification and other labor-saving innovations. Republicans generally agreed that prices were too low and it would help pull us out of our economic slump if American producers were shielded from foreign competition.
Big mistake. Trading partners had warned of retaliation, and indeed boycotts and reciprocal trading restrictions soon broke out. Canada, our most loyal trading partner, imposed tariffs on 30% of our products and formed closer economic ties with the British Empire. France, Britain and Germany all formed new trading alliances.
Yet initially, the medicine seemed to be working. Factory payrolls, construction contracts and industrial production all profited from the reduced market competition.
But the loss of the inherent advantages of trading soon became clear. From 1929 to 1933, US imports fell 66% and exports decreased 61%. World trade nearly ground to a halt, falling by two-thirds from 1929 to 1934.
Unemployment was about 8% when Smoot-Harley was enacted, but the promises to lower it further never panned out. The rate jumped to 16% in 1931 and 25% in 1932-33, falling back to pre-Depression levels only during World War II.
Tariffs didn’t cause the Great Depression, but they clearly deepened and prolonged it. Without Smoot-Hawley, it might have just been another temporary recession, not much worse than many other economic downturns in our history.
The take-home message is that free trade is a voluntary interaction that reliably promotes prosperity, both in theory and in practice. It is a classic win-win for participants, in contrast to protectionism which is based on the principle that the stronger party wins by defeating the weaker one.
The 2018-19 tariffs imposed by Trump and expanded by the Biden administration proved the point once again, reducing long-term GDP by 0.2% and resulting in the loss of 142,000 full-time equivalent jobs.
Nonetheless, Trump still favors strength and domination, with an emphasis on negotiations where he “holds the cards”. The lack of success last time has not dissuaded him from unleashing a barrage of tariffs with impositions, pauses, increases, suspensions and escalations that have left producers around the world desperately scrambling to protect their businesses by anticipating his next move.
Trump is playing with fire here. If he does ignite a trade war that results in another downturn, he may find that the American economy is not as resilient as it once was. Decades of uncontrolled deficit spending have left us deeply in debt and without the reserves necessary to withstand much more fiscal abuse.
The lessons of history and the laws of economics are clear. Tariffs don’t work. Proceed with caution.
Discussion (66)
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What does normal trade and automation produce? Deflation. What does the Federal Reserve constantly produce? Inflation.
The solution is to switch the deflation because that is the way God intended man to live. If they want to subsidize something, let them.
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News flash: Free trade *is* a good thing, but only if it's reciprocal. If American butter gets a 293% tariff slapped on it in Canada, how does that in any way look like "free" trade?
Tariffs are generally bad for trade, I don't think anyone's ever made a rational argument otherwise. The problem is, is free trade being reciprocated, and for state actors who play even well outside the norms (China and its rampant IP theft), you're going to have to cough up another solution that accounts for fields of play that look, even casually, as wildly uneven.
What you're seeing and hearing with the rhetoric is change, and there's going to be some short-term pain for longer-term gains. And not in 10 years, it'll be in a year or two that the gains made (not just tariff impacts, but everything from government spending, regulatory overhang, etc) will become wildly evident and Biden supporters will knock old people down in their rush to lay credit at a withering husk's feet.
Good times. Special friends.
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I wonder if that's true. It sounds like it would be true in the one hypothetical you mentioned, but I wonder if the statement is true.
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Though Trump and many others right here on Ricochet are trying to make a case that trade is a bad thing.
Unfortunately, I don't see much to be done when a foreign country insists on tariffs. Those tariffs hurt the host country just as much as it hurts their target countries, but that's what we get from politicians who either don't know any better, are swayed by lobbying bizness interests, or don't care about the welfare of their citizens.
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In some cases, they hurt themselves far worse than they hurt the outsiders. To enrich the rice farmers of Japan (which of course make up a tiny percentage of that country's population), Japan only allows 770,000 metric tons of rice to be imported each year without tariffs. Any imported rice after that quota has been met is assessed a tariff of ¥341 ($2.30) per kilogram. Source: The Japan Times. This hurts rice farmers in the U.S. (and any other rice-exporting country), but it is far more punishing to the rice consumers of Japan.
I find it reprehensible that Japan's government is lowering the standard of living for all of its people to stuff money into the pockets of domestic rice producers. Should we reciprocate? If Japan is going to screw over its people, should we do the same and screw over ourselves? I certainly say no. If the voters of Japan put up with this and don't demand an end to this costly protectionism, that's on them. We should not emulate corruption out of "reciprocity."
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