A Brief History of Tariffs
The all-knowing “they” like to say that history repeats itself and, recently, it seems like they are correct again. The year is 2018 and politicians are again falling for the erroneous belief that tariffs are good economic policy. Late last week, President Trump announced that he will be implementing a 25 percent tax on imported steel and a ten percent tax on imported aluminum. Trump and his supporters believe that these tariffs will improve the American economy and strengthen national defense by incentivizing domestic companies to produce steel and aluminum in the United States; however, history shows us otherwise. Tariffs in the past have done more harm than good because these policies prevent cheaper goods from flowing into the country. Cheaper goods imported from other countries are beneficial to the American economy because they allow domestic manufacturers to lower their operating costs, which, in turn, allow them to invest money and capital into new projects and new projects bring new jobs.
1920: The Jones Act
The Merchant Marine Act of 1920, or Jones Act, was passed in late 1920 and has been a nuisance for American businesses ever since. The act essentially mandates that ships carrying cargo between mainland ports, or between the continental United States and her various territories, must be U.S. flagged, built, owned, and crewed. What the act in effect does is drive up costs for not only commercial shipping companies, but for American consumers as well. While the law doesn’t directly prohibit foreign vessels from transporting goods to various ports and U.S. territories, any foreign-flagged vessel that does so is subject to hefty tariffs. The tariffs drive up the cost of shipping goods by artificially limiting the supply of available carrier vessels, which thereby drive up the prices of those goods that are carried to their destinations. As with all protectionist legislation, it benefits a narrow interest, at the expense of the majority of the country. Recently the Jones Act has been back in the news in the aftermath of Hurricane Maria which devastated Puerto Rico in September. The act’s prohibitive nature has had the effect of not only driving up the cost of moving goods to Puerto Rico, but increasing the prices of those already scarce necessities that needed to make it to the island. These increased costs have made it hard for citizens who are suffering to acquire the goods that they need.
1930: The Smoot-Hawley Tariffs
When the stock market crashed in 1929, protectionism began to gather a lot of support from American citizens who were eager for economic relief. The result was the United States Tariff Act of 1930, also known as the Smoot-Hawley Tariff, which increased import costs by around 50 percent. The results of this tariff on the Great Depression are debated today, but most economists believe that it at least played a minor role in worsening economic conditions during that time. The tariffs decreased gross national product (GNP) by two percent. GNP is a measure of economic health that was used in place of gross domestic product during the early 1900’s. A two percent decrease in GNP is not a lot when considering the entire economy but the tariff did not affect every industry evenly. The agriculture and mineral industries were harmed disproportionately when compared to other industries because other countries increased their import tariffs in retaliation to Smoot-Hawley, which dramatically decreased U.S. exports. Agriculture and steel exports dropped by around 65 and 85 percent, respectfully. The Smoot-Hawley Tariff worsened the effects of the Great Depression dramatically for states in the Midwest who relied on these exports.
1934: The U.S. Sugar Program
If any of the tariffs on this list can be pointed at as being an example of pure political cronyism, the Sugar Act of 1934 is that one. Originally written as an amendment to the New Deal’s Agricultural Adjustment Act, the Sugar Act designated sugar as being subject to special protection under the various provisions within the New Deal. Much like the New Deal itself, the Sugar Act was meant as a temporary measure that would later be repealed as its usefulness expired. As is the case with most “temporary” legislation, this never occurred. Nowadays the tariff functions simply to enrich a small cadre of domestic sugar growers, at the expense of American businesses and consumers alike. The tariff works by establishing a quota on sugar imports and subjecting any imports that exceed that quota to a prohibitively high tariff. As of 2013, the tariff was 88 percent on raw sugar and 73 percent on refined sugar imports. The effect of this dual tariff-quota system has been to force American consumers to pay an average of 79 percent more for raw sugar and 87 percent more for refined sugar, which has cost American consumers $1.3 billion more than if they had been allowed to buy from abroad.
2002: The Bush Steel Tariff
Probably the most presently relevant tariff in the past century is the steel tariff established under President George W. Bush. The tax was an eight to 35 percent tariff implemented in order to protect domestic steel makers who were going out of business in significant numbers. The highest tax of 30 percent was levied on Chinese steel imports. In the years leading up to the tariffs, more than 30 steel manufacturers went out of business because of cheap price of imported steel. The steel tariff did not help the overall economy, however. The result of the tax was a greater loss of jobs in other sections of the economy than there was workers in the entire steel industry. In total, 200,000 Americans lost their jobs because businesses could not afford to operate with the higher price of domestic steel. The entire American steel industry only employed 187,500 workers in 2002. California, Texas, and Ohio suffered the worst with 19,392, 15,826, and 10,553 jobs lost, respectively. Some producers chose to compensate for the higher costs by raising the prices of their goods, which harmed consumers.
History shows us that is it unlikely that any future tariff will work to benefit the economy; however, it looks as if the U.S. is on a course to again repeat this economy fallacy. Trump’s tariffs will have similar effects on the economy as previous import taxes. The higher domestic steel prices will most likely be passed on to consumers, just as they were in past, which will increase the prices of goods such as automobiles, boats, and canned foods. As seen during the Great Depression with Smoot-Hawley, the potential for high import tariffs also increases the likelihood of a trade war. The European Union recently announced that it is planning on taxing certain consumer goods produced in the U.S., such as peanut butter and cranberries, if the Trump’s tariffs become a reality. China and Canada have made similar threats. A trade war will come at the expense of domestic producers who will see a decrease in sales abroad. Trump should take a lesson from his predecessors call off the tariffs.