November 30, 2018
It's pretty obvious that tariffs hurt everyone,
starting with the country that initiates them
Take a guess which U.S. President I'm talking about:
The President of the United States started a trade war using tariffs. One Thousand economists signed a petition arguing against it. The Administration decided to provide lots of Dollars in aid to U.S. farmers to help them get through the dispute.
You're probably thinking this must be Trump, right? Nope. I'm talking about President Herbert Hoover, who proposed tariffs on agricultural imports during a farm crisis in the early years of the Great Depression. But Senators Reed Smoot and Willis Hawley offered up their own legislation, including tariffs on industrial goods. A 1,000 economists unsuccessfully signed a petition to urge Hoover to veto it.
The rest of the world responded with tariffs on U.S. exports, resulting in a decline of 61% in 1933, devastating the economy. The Smoot-Hawley Act turned out to be a complete and utter disaster. Hoover's farm aid bill was a Band-Aid that didn't help.
Like that old expression, "History might not repeat, but it rhymes", we find ourselves in similar circumstances. The U.S economy is strong this time around, but nevertheless, we have a lousy track record when it comes to using tariffs as a weapon.
In 1987, President Reagan hit Japanese imports with tariffs on things like cars, computers, power tools, and TV's due to what his administration claimed were Japan's failure to comply with trade agreements. The Japanese retaliated by making better products for lower prices, so the trade deficit with Japan didn't slow down. In 1984, it's estimated that American consumers paid 53 Billion Dollars more for Japanese imports because tariffs.
In 2002, President Bush imposed temporary tariffs on imported steel. The EU won a complaint with the WTO (World Trade Organization) and Bush wound up ending the tariffs 18 months after they were initiated. The result was Americans paying more for steel and the loss of as many as 26,000 American steel-related jobs.
Today, companies like Whirlpool, Harley Davidson, and General Motors are paying more for steel, are finding new foreign locales for production, and/or laying off workers. All have blamed Trump's tariffs in whole or in part for these decisions. American Soybean farmers are literally plowing their crops back into the soil because China slapped a retaliatory 25% tariff on American soybean exports.
China's economy is feeling the pinch too. I guess you could say that the country with the higher threshold for pain will win.
The problems with tariffs are two-fold. First, it sounds like a simple solution in that it'll make our domestic products more competitive in a global market and raise funds for our country. Second, there are unintended consequences, like how China is buying more soybeans from Brazil and American companies are looking to move Chinese production to Cambodia and Vietnam.
This weekend is the most anticipated G-20 (Group of 20 Nations) meeting since it was formed in 1999. Presidents Trump and Xi are meeting to talk trade. Will cooler heads prevail? They both have gripes, incentives, and are under pressure to bring home a victory. President Trump has the advantage of the strongest and biggest economy on Earth. President Xi has the advantage of not having to worry about elections. They are both wondering which one of their citizenry has the threshold for pain.
So, how does this esoteric thing called a tariff actually work, who pays it, and who gets to keep the tariff money? I suppose I could say YOU and I pay for tariffs, but that oversimplifies the subject. Is it actually creating value for the U.S.? Here are the answers you must know, in a very concise, brief article from the NY Times, by Jim Tankersley. It's a must read! But just to make one more point before I let you go: Trade tariffs/wars also backfire on the countries that impose them on us, like that time when Great Britain imposed taxation without representation on the 13 American colonies, which resulted in the Boston Tea Party followed by The Revolutionary War.