Trade
is the mother of money. ~ Thomas Draxe (1613)
Unfettered
production and consumption of foreign-made goods – aka, “free-trade” – is so
old school. Just ask Donald Trump.
Should we hop
back to the old days of high tariffs, big customs duties and large quotas on
foreign imports to make our country great again? Should we remember what the
world was like after our Congress passed the Smoot-Hawley Tariff Act in 1930? Here’s
a hint, it wasn’t that good.
Most economists
and historians agree this Act, which significantly raised US tariffs to a level
not seen in over the previous century on more than 20,000 types of imported
goods, not only exacerbated the Great Depression but harmed the public’s
economic prosperity due to higher prices. The Smoot-Hawley tariffs were
ignominiously rescinded within five years after our major trading partners
retaliated with their own increased tariffs on US exports.
But here we are
with a president who is ready to roll the free-trade clock backwards by
building “protective” tariff walls, not just his physical wall across our
Mexican border.
International
trade has been a quarrelsome series of policy debates (and much more) for at
least the past 250 years. From an economic perspective, these disputes were
formalized when Adam Smith stated in 1776 that free trade (trade not encumbered
by tariffs or other protective barriers) was the basis of the wealth of nations.
In the early 19th century David Ricardo, another British political economist,
provided a notional rationale – his theory of comparative
advantage – for determining which goods and
services should be produced (and traded) to allow
each trading nation to benefit from the trading. Unsurprisingly,
these debates have continued and, as trade has greatly expanded, have become
more consequential.
In our current
age of globalization, there's a lot of international trade. It can be
argued that the first "early modern age of globalization" in the West
began in the 17th and 18th centuries (although inter-regional trade occurred
since ancient times) with the development of the Portuguese, Spanish, Dutch and
British empires. This early globalization certainly gained importance with the
resultant increase in international trade, although its benefits were
exclusively realized by the conquering Europeans.
Since the end of World War II the doctrine of trade
liberalization – lowering or eliminating import tariffs, quotas and subsidies –
has been publicly praised and followed by the majority of (already-developed) Western
nations. These nations, with the strong support of many economists, have
genuflected at the altar of free-trade. The creation of the World Bank, the International
Monetary Fund and the General Agreement on Tariffs and Trade (the predecessor
of the World Trade Organization - WTO) by 1950 was predicated on expanding
post-war international free-trade across the planet. Virtually all contemporary
nations have comported with this vision – that freer trade benefits everyone.
The WTO states that total world merchandise exports were
$16.0
trillion in 2016, more than a 150% increase since 2000. The WTO now has 159
member countries, with 24 countries negotiating their WTO
membership.
For more than 60
years US exports and imports have followed a bumpy but long-term increase as a
share of our real (inflation-adjusted) GDP. This increase has happened as
tariffs have been reduced and overall trade has grown.
The US and China
are now the world’s largest traders. US exports represented
11.9% of our 2016 GDP, $1.45 trillion (T). Chinese
exports represented 19.6% of its 2016 GDP, $2.10T. Germany wears the crown as
the most intensive trading nation because its sizeable exports (ranked
third-highest) represent an amazing 46.1% of its GDP. That’s a lot of Porsches,
BMWs and Mercedes.
Let’s now
consider China, the world’s largest exporting nation and Mr. Trump’s proclaimed
nemesis. One
analyst diplomatically characterizes the
shifting US international trade priorities as a “protectionist crouch.” Others perceive
it as a retreat from the leadership the US has provided for decades in the
international economic community. Predictably, China sees Trump’s change in US policy
as an opportunity and is very willing to assume more leadership in the world
economy. Beijing is presenting itself as a benign alternative to the US in the
international policy sphere. China’s rising geo-political influence has been
caused by several reasons; the largest is its export-driven economic growth. Mr.
Trump’s priority of building tariff walls specifically to protect domestic
manufacturing jobs is simply policy icing on China’s expanding geo-political
cake. For perspective, just 7.7% of the US labor force was in
manufacturing in 2016.
China’s growth from a poor, “lesser-developed country” 40
years ago began when Deng Xiaoping took power in 1978 and instituted
significant economic reforms. China’s much heralded growth and development has
been founded on government-led economic planning, large state-owned and
subsidized enterprises in strategic industries, direct state control of capital
markets, restrictive rules for any foreign manufacturer wanting to operate in
China, and little concern for the traditional guidelines of free trade. Despite
such centralized planning and obstructive trade policies, China gained
membership into the WTO in 2001. China’s growth hasn’t relied very much on Adam
Smith’s “invisible hand” of competitive market forces for its economic
progress; it’s a centrally-planned economy with a dose of market interaction
around the edges. The Communist Party of China describes its economic system as
a “socialist market economy.”
China’s development into a more modern, industrialized
economy via restrictive, non-free trade policy has an interesting parallel in
US history. This history exposes the myth that we have always practiced
free-trade throughout our economic development.
Several years after winning the Revolutionary War and freed
from British control, Alexander Hamilton successfully argued before the first
US Congress that our new nation should be protected from established, more
developed countries like Britain, France and Spain. He coined the compelling
phrase “infant industries” to claim that strong tariff protection was needed
for our new nation. Congress agreed with his request. Domestic industries that
benefited from tariff security included textiles and iron, and later steel.
Some specialists believe this early, vigorous trade protectionism of our
nascent industries allowed the American economy to be one of the fastest
growing throughout the 19th century and into the early 20th century.
With this trade protection, revenues from US tariffs (also
called customs duties) were a very large part of the federal government’s total
revenues for over a century. Using high tariffs thus served two purposes, they
helped protect our infant industries from foreign imports and they provided
revenue to our federal government. It wasn’t until the 1913 passage of the 16th
Amendment which legalized the federal government’s use of a personal and
corporate income tax that customs duties’ fiscal importance began to wither.
The table below shows that customs duties accounted for at
least 81% of the government’s total direct revenues from 1792 through 1850. Even
in 1900, more than 100 years after protectionist tariffs were initiated by our
government, customs duties accounted for over one-third of the government’s
revenue. Notice the significant bump in federal customs duty revenues in 1930
because of passage of the Smoot-Hawley Tariff Act.
US Federal Government
Revenue, 1792-1950 (millions $)
Year
|
Customs Duties & Fee Revenue
|
Total Direct Revenue (TDR)
|
Customs Duties Percent of TDR
|
1950
|
$407.0
|
$39,443.0
|
1%
|
1930*
|
$561.0
|
$4,830.2
|
12%
|
1920
|
$294.2
|
$7,380.4
|
4%
|
1900
|
$238.2
|
$669.6
|
35%
|
1850
|
$39.7
|
$49.1
|
81%
|
1800
|
$9.1
|
$11.1
|
82%
|
1792
|
$3.4
|
$3.7
|
92%
|
Trade protectionism was very much alive and well during the initial
industrialized growth of the US in the late 18th and the 19th century. This
long period of US non-free trade policy is forgotten by most modern economists
and politicians. Why should they remember; it’s now the age of globalization.
Many people say that the development of the US into the
world’s macroeconomic power was because of a straight free-trade hit. But it’s
not a hit, it’s a myth. It’s a myth that we’ve always used free-trade policies
to achieve our greatness. We didn’t, as explained above. Ah, what a difference
a century or so of growth based on protective “infant industries” tariffs
followed by decades of freer-trade as a fully-developed nation makes.
For the past 65 years the US and many other nations have largely
adhered to the free-trade faith of reducing tariffs on many goods and services.
Significant and broadly beneficial bilateral and multilateral trade agreements
have been implemented by the US with other trading partners. US free trade
agreements include 20 bilateral free-trade agreements, the
Tokyo
Round, the Uruguay Round and the North American Free Trade Agreement (NAFTA).
That is not to say that the US, or any nation, allows all foreign products to
be imported with no tariff. Nope. The US International Trade Commission states
that many agricultural products like sugar, cotton and vegetables, as well as
live foxes, umbrellas, and nuclear reactors are subject to import tariffs.
It’s a different world now. Or is it? Is our blinkered, zero-sum
micro-man
leader Donald Trump returning to our forgotten olden days of uniformly high
tariffs to battle specifically with China on the international trade stage? It
seems so.
China has the second largest GDP in the world and, like the
US, is a member of the Group of Twenty (G-20) nations. Nevertheless, its GDP
per capita is $8,123 and
not
high enough to be ranked in the top 50 nations. Its investment- and export-led
economic growth over the past 30 years has been impressive. Equally notable,
the Chinese government had extensively raised literacy and life-expectancy
levels, and reduced poverty. In 2017 its GDP growth slowed to
6.5%,
the 16th highest in the world according to the World Bank. The US GDP growth
for the last quarter of 2017 was 2.6%, less than half the Chinese growth rate.
As a candidate, Mr. Trump denounced the “false song of
globalism.” In his first week as president, he canceled US participation in the
Trans-Pacific Partnership (TPP), a large regional trade deal with Japan, New
Zealand and nine other pacific-rim countries that was initiated in 2005 to
contain China. Mr. Trump has publically criticized Canada, China, Germany,
Mexico and South Korea for exporting more to the US than they import from us.
He is renegotiating trade pacts with Canada, Mexico and Europe to get a better
deal for American workers. Mr. Trump has expressed a strong preference for
bilateral trade agreements rather than larger, multilateral ones like NAFTA and
the TPP.
Last month his administration decided to impose tariffs on imported
washing machines and solar cells and modules from China, Malaysia and South
Korea to help domestic firms’ workers. The tariffs’ overall effect on the US
solar power industry will be to raise consumer prices of solar panels and also
reduce employment by thousands of US workers. Also, the Trump administration started
an investigation into claims that China has infringed on American intellectual
property that could occasion investment restrictions or further tariffs.
On February 16, the Commerce Department recommended that the
president impose substantial tariffs or quotas on imported steel and aluminum
from China, Brazil, India, Hong Kong, Russia, South Korea, Venezuela and
Vietnam to save American jobs. US auto makers complained that such trade
restrictions will increase their costs and raise vehicle prices.
Mr. Trump dismissed objections to these trade measures, saying
that the United States was considering tariffs, quotas or both. “You may have a
higher price, but you have jobs.”
This quote typifies the president’s myopic view of raising
tariffs on specific goods. The consequent price increases will directly affect
millions of consumers (in this case of steel- and aluminum-using products like
cars and trucks); the possible benefits are aimed at far, far fewer workers.
Mr. Trump’s interest in building tariff walls scorns the historically high
likelihood of other nations retaliating against these US tariffs with ones of
their own, and filing formal complaints before the WTO.
In fact, America’s direct options for punishing China’s
huge, worldwide increase in steel and aluminum exports are fairly
limited.
Why? Because the Obama administration
already
imposed a series of restrictions on Chinese steel imports in previous years; only
2% of American steel imports came straight from China in 2015. So, it may be media-worthy
politics that possibly saves jobs (depending on how they’re counted), but
ultimately it’s bad economics for consumers as prices will rise.
Protectionist tariffs certainly can serve useful economic
purposes for developing nations, as they did for infant industries in the US
well over a century and a half ago, and as they have more recently for Japan,
South Korea and other Asian Tiger nations. But it’s been a very long time since
we’ve been a nation of infant industries, despite the claims of domestic
manufacturers. Erecting high tariffs to shield established industries (like US
aluminum, steel, consumer appliances and agricultural products) in
already-developed countries like ours at best only provides narrow, micro
benefits and causes economic pain for the general consuming public.
Politically, the President’s retreat from our nation’s
half-century record of trade liberalization seems to have boomeranged internationally
and instead has provided China with an opening to fill the policy vacuum Mr.
Trump created. Perhaps he recognized his mistake in building new trade walls –
a very faint hope –when he offered a slightly different tune about trade at the
January 26 Davos meeting saying, “America first does not mean America alone”
and “America is open for business.” Did the listeners believe him? Doubtful,
very doubtful. Just ask the Chinese, Canadian, Mexican and South Korean leaders
whose businesses will be subject to higher US tariffs.
Mr. Trump’s foray into the dark, high-tariff past may
provide ephemeral, slender benefits that will be paid by the consuming public’s
much broader pain from higher-prices. If, somehow, we millions of consumers
were to gain influence comparable to that of far narrower private interests,
public decision-makers like our occluded president might support of our
interests of broad choices and fair, low prices. Politicians like Mr. Trump always
support these consumer interests in their campaign speeches but disdain them once
elected to office. That’s why Thomas Draxe’s 405-year old quote remains
relevant.
