Tariffs Are Bad … Not So Fast

Tariffs Are Bad … Not So Fast

One year and a few weeks ago we discussed the pros and cons of Trump’s trade deals and proposed trade policies which conservatives complained would be the end of free trade.

But … will it really be the end of “free” trade?  And was it all that “free” to begin with?

Free trade as an economic theory is the bedrock of conservatism, because it is the only economic theory that reflects the rights of man – the right to be free to pursue life, liberty and happiness.  It drives down costs for the regular person because more product is available in the market, and producers have to reduce prices to gain or keep market share.  It is the grease for the wheels of free market capitalism, and the cornerstone of Republican trade policy since the end of World War II.  Countries that do commerce with one another are less likely to fire their guns at one another.

Raising tariffs has been, more often than not, bad for the US economy, and no greater example is the Smoot-Hawley Tariff Act which helped kick off the decade-long Great Depression.  But are they always bad?  We have over 100 tariffs right now on thousands of goods and products that enter the US, and our competitors have even more on our products entering their country.

 And let us not forget – tariffs were one of the principal means of raising revenue by the federal government before the imposition of the income tax.  In fact, the tariff was a Constitutional authority granted to the Congress in the Constitution itself:

                Article I, Section 8:  …The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense[note 1] and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States …[and to] regulate commerce with foreign nations …

 For free trade to work, it must be fair.  Fair Trade is a better description of what serves the long-term interest of our economy.  Pundits and TV commentators can say all day long that Trump is a protectionist, and that we are going to end up in a trade war and this will be bad for the economy.  Yet how is it not already bad for an economy whose manufacturing industries have simply disappeared, and many domestic producers across numerous business models have simply vanished.  When a foreign country provides subsidies for their domestic industry, and we do not, that is NOT free trade.

Trump’s initial call for steel and aluminum tariffs are aimed at China, but there may be collateral damage. Allies such as Canada could be hit harder by the proposed rule changes. Is it fair to say that tariffs are not always a bad thing? Here are the pros and cons of applying tariffs to foreign goods coming into the US:


I. What are the pros of applying tariffs against foreign producers?

  1. Protects existing US industries. By making imported goods cost more, domestic companies can hire more local employees, increase wages for US citizens, and create more jobs locally which benefits the lives of local workers.  It is not just for economic reasons – the Pentagon has signed off on the steel tariff plan as ensuring a domestic source for national security reasons.  The US already suffers from Obama-era EPA regulations which destroyed the US domestic “rare earths” market, allowing China to control 95% of all rare earth minerals.  These make up our TV’s, smart phones, computer chips……you name it.  Lastly, it is important to remember that China, among others, subsidizes industries with state support.  tariffs are simply making the playing field level.  Therefore, and quite obviously, tariffs can have a domestic benefit.
  2. Can protect infant industries from more mature foreign competition. Tariffs make imports more expensive to buy – this means new domestic companies can price their products and services in a more competitive fashion, allowing them to survive against a foreign import monopoly.
  3. Trump tariff only hits 2% of US imports. It is possible we avoid a trade war since the tariff is only 2% of the entire US import market.  The steel and aluminum tariff is a curious choice, given that most of our steel and aluminum comes from our ally to the north, Canada.  The Chinese have been the rhetorical target, but they will not suffer too much from a US tariff, since 40% of their steel production goes to Japan.


II. What are the cons of applying tariffs against foreign producers?

  1. In the long-run, they don’t work. You cannot make a rival nation conduct trade in a free and fair fashion.  If country “X” subsidizes their steel industry, and we do not, then they will have an advantage.  Over time, their domestic industry will expect this advantage.  If country “Y” then tries to level the playing field, creating “fairer” trade, then country “X” will have political fallout, forcing them to respond in kind.  This precipitates a trade war, and leads to less trade, contracting GDP, and lower standards of living for all concerned.  As an example, George W. Bush (43) enacted 30% steel tariffs against Japan and the EU.  Both threatened to respond by imposing stiff tariffs on Florida citrus growers and motorcycles … the US backed off rather that start a trade war.
  2. Tariffs will reduce innovation. As industries are protected through tariff (or subsidy), they lose the motivation and desire to innovate.  Wages stagnate, jobs are not created, because this form of government intervention freezes the existing market in place.  It can also lead to much higher prices for consumers, since the price signal sent to the market is that there will not be competitive pricing between competing products.
  3. Once foreign competition retaliates, domestic exporters will begin laying off workers. Domestic industry which relies heavily on exporting will come under direct assault once foreign competition begins levying their own tariffs.

Ronald Reagan successfully implemented a tariff regime which forced Japanese electronics and automakers to change their pricing and, in the end – build plants in the US and employ US workers.  That is one of the few examples of a tariff strategy that did not prompt a trade war.  BUT … it was a different time and an era of dollar strength and American preeminence.  Recovering from the last 8 years, do we have the same bargaining strength as we once did?  Further still – American leadership is often predicated on being the only country that ever does follow the rules … will we be seen as breaking the rules this time?  (World Trade Organization treaty obligations).

Ensuring we maintain a domestic capacity for steel and aluminum production is a reasonable national security expectation.  And most tariffs are a political, not necessarily economic, decision.  Politics matter … the productive lives of US blue collar workers matter … and to be successful, free trade must be trade between countries that is considered fair.

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