Tariffs, Protectionism, and the Failed Economics of the Past Revisited
Cadet Bone Spurs has erected 25% and 10% tariffs on steel and aluminum imports. He has also announced 50 billion dollars in tariffs against China. China has responded accordingly with an announcement of 50 billion dollars in tariffs against the United States.
This move has spooked markets, prompted his chief economist’s resignation, rattled major US allies, and widened a rift with establishment Republicans. Why? Because tariffs are a hallmark of protectionism which is 19th century thinking in a 21st century world.
What Is Protectionism?
Protectionism refers to government actions and policies that restrict or restrain international trade, often with the intent of protecting local businesses and jobs from foreign competition. Protectionist policies can be implemented in four main ways: tariffs, import quotas, product standards and government subsidies.
Politically, William Hauk notes that while the Dotard cited “national security” as the impetus, he’s been vowing since the campaign to use trade policy to restore jobs to the American manufacturing sector, which has suffered in recent decades. The steel sector, for example, supported as many as 650,000 American workers in the 1950s, yet now employs only about 140,000.
Additionally, steel production is concentrated in old industrial states in the Midwest, such as Pennsylvania and Ohio. These states are swing states which gives industries with workers in those regions outsized influence.
Tariffs are charged and collected by governments to raise the price of imports to equal or exceed local prices. There are three types of tariffs that can be implemented for protective measures. Scientific tariffs are imposed to raise the prices of products to end users. Peril point tariffs are implemented when less-efficient industries are in jeopardy of closure due to an inability to compete on pricing. Retaliatory tariffs can be used as a response to excessive tariffs being charged by trading partners. This is what the dotard and China are engaging in presently. This is otherwise known as a trade war.
Tariffs transfer money from a good’s consumers to its producers. This transfer is usually economically inefficient because the benefits that domestic producers receive from a tariff will generally be less than the costs to domestic consumers.
Consumers are typically a very large and dispersed group who may be able to bare the increased cost due to tariffs. They’re often less motivated in opposing trade protection than a relatively narrower and more unified group of producers who have a lot to gain.
Hauk explains why steel tariffs are special:
….far from being broadly dispersed, steel consumers are heavily concentrated in the construction and automotive industries — which have very powerful political lobbies of their own. As a result, steel consumers are more likely to balk at the higher prices that would result from tariffs.
In 2002, it was pushback from these industries that helped persuade the National Association of Manufacturers to come out against the tariffs. Eventually the World Trade Organization ruled the policy illegal because it violated U.S. trade commitments, which led to the threat of a trade war with the European Union.
The Bush administration withdrew the tariffs in December 2003, about 21 months after they were imposed, but not without a cost. The Consuming Industries Trade Action Coalition found that 200,000 workers in U.S. manufacturing lost their jobs as a result of the tariffs. For comparison, the entire U.S. steel industry employed 197,000 at the time.
They’ve Never Worked
Let’s start at the beginning. British trade policy toward the American colonies was mercantilistic. The mother country expected to gain materially from all colonial trade. The country’s mercantilist policies were a major burden on the colonies. In that way, British protectionism was a significant cause of the Revolution.
Having achieved independence, however, many Americans advocated protectionist policies similar to those they had earlier condemned. Alexander Hamilton, the principal advocate of import restrictions, based his proposals on the alleged needs of infant industries.
Bruce Bartlett recounts the history of protectionism in America.
Although Congress adopted the first tariff in 1789, its principal purpose was to raise revenue. Rates went from 5 percent to 15 percent, with an average of about 8.5 percent. However, in 1816 Congress adopted an explicitly protectionist tariff, with a 25 percent rate on most textiles and rates as high as 30 percent on various manufactured goods. In 1824, protection was extended to goods manufactured from wool, iron, hemp, lead, and glass. Tariff rates on other products were raised as well.
That first wave of protectionism peaked in 1828 with the so-called Tariff of Abominations. Average tariff rates rose to nearly 49 percent. As early as 1832 Congress began to scale back tariffs with further reductions enacted the following year. In 1842, tariffs were again raised; but by 1846 they were moving downward, and further lowered in 1857. Following the 1857 act, tariffs averaged 20 percent.
Bartlett, citing economist Taussig who studied the tariffs, concluded they didn’t do anything for domestic industry. What we learned from those tariffs was that so-called infant industries never grow competitive behind trade barriers. Instead, they remain perpetually underdeveloped, thus requiring protection to be extended indefinitely. In fact, according to Bartlett, free trade within the U.S. allowed us to offset the negative effects of tariffs:
It is also important to note that the adverse effects of tariffs in 19th century America were more than offset by the economic activity that constituted the western expansion across the continent. Some 20 million immigrants came to the United States in that century. Also, much economic growth came from transportation, farming, mining, and construction of infrastructure. In effect, the United States was a giant, continental-size free-trade zone, from the Atlantic to the Pacific — the equivalent of the distance from Madrid to Moscow.
Bartlett continues with the history of tariffs:
In the election of 1888, Republicans called for tariffs to protect American manufacturing. 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. They understood that sufficiently high rates would so discourage imports that tariff revenues would fall.
Protectionist tariffs remained 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 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.
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.
The Smoot-Hawley tariff of 1930 was it for 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.
Whatever the degree, the effect of Smoot Hawley certainly was adverse, and the tariff was certainly bad policy. World trade virtually collapsed following passage of it, meaning that if it wasn’t a major cause of the Great Depression, it certainly made a bad situation worse.
Bartlett claims that:
Politically, at least, in the long term the memory of the Smoot-Hawley tariff has kept Americans committed to a free-trade policy. For more than 60 years, a guiding principle of U.S. international economic policy has been that tariffs and other trade barriers should be reduced, that trade wars must be avoided at all costs, and that the best way to achieve those goals is through multilateral negotiations.
It seems though we really just talk a good game.
History has shown that the U.S. has never been a truly free trade country – one with virtually no barriers to trade with other nations. Both Republicans and Democrats have pursued protectionist policies.
No major country has ever been a purely free trader in modern history. Great Britain came the closest from 1860 to World War I, when they eliminated virtually all tariffs. Among major nations in the post-World War II period though, the U.S. has been closest to free trade.
Still, Giulio Gallarotti has documented how our free trade mentality has always intended to shelter domestic industries and workers from the full impact of globalization and open trade. The U.S. government tends to talk a lot about free trade but maintains a protective layer of trade barriers across the economic landscape. Garotti believes this is to be expected:
This is a natural outgrowth of democracy and the granting of suffrage to more people. As the masses gained greater political power at the turn of the 19th century, politicians faced greater pressure to protect their constituents from the vicissitudes of trade.
For example, at the ballot box, the issues of economic growth and unemployment have often been critical to outcomes. In fact, in every presidential election since World War II, economic issues have figured prominently if not centrally.
And on a broader level, special interests such as unions and business groups brought their political weight to bear at the doors of lawmakers to protect their members.
Ultimately, as Galarotti explains, those whom advocate for tariffs and protectionism just want to be protected from the excesses of capitalism making them progressives in all actuality.
Trade carries great benefits, as is clear from the fact that the most prosperous nations today embrace trade as a vehicle to greater wealth. But trade concomitantly generates costs.
While the benefits of freer trade are spread over society as a whole in the form of rising real incomes and access to superior products, some localities experience costs that severely plague specific groups. The “destructive” part of “creative destruction” – coined by political economist Joseph Schumpeter to characterize capitalist competition – is synonymous with industries failing and their workers losing jobs.
While in theory such dislocation can be overcome over time by people migrating to more competitive industries and wealthier regions, in the short run it is devastating for families that are less mobile than others. And in fact people are far less mobile than liberal theorists like to contemplate (especially older blue-collar and unskilled workers).
Indeed an overwhelming amount of research suggests that theories upon which free trade are based often fail quite significantly in the face of reality.
And that’s where protective barriers come in. They guard these groups from the economic dislocation of unrestricted competition across national boundaries. This renders a capitalist society more tolerable.