Hold the presses, tariffs are back folks!
President Donald Trump is now championing steel tariffs as part of his grand vision to make America great again.
The New York Times reports that Secretary of Commerce Wilbur Ross has recommended “a 24 percent tariff on all steel imports from all countries.” President Trump justified this tariff proposal on the grounds that Chinese steel imports pose a threat to US national-security interests while also undermining the economic health of the American steel sector.
Despite the fancy rationalization for these tariffs, we’ve already seen this movie play out multiple times throughout US history. The ending has always been the same: more expensive goods for consumers and the initiation of trade wars.
The United States Has Been to This Rodeo Before
A simple trip down memory lane, specifically the 1930s, paints a lurid image of what could potentially occur if this far-reaching tariff policy is actually implemented. Following the stock-market crash of 1929, then-President Herbert Hoover scrambled to find ways to get the United States out of her economic quagmire. Contrary to conventional historical narratives, Hoover resorted to interventionist programs in his efforts to stimulate the economy and keep wages high.
Of particular relevance to these tariff discussions was Hoover’s signing of the Smoot-Hawley tariff into law in 1930. Authored by Senators Reed Smoot and Willis Hawley, it raised tariffs on over 20,000 goods, raising the average rate to roughly 40 percent.
After Smoot-Hawley’s passage, countries like Canada and Italy retaliated in kind with their very own punitive tariffs on American goods. This set off a domino effect of trade wars across the globe that resulted in a 66 percent decline in total world trade from 1929 to 1934. Not only did this trade-war environment exacerbate the already lackadaisical conditions of the Great Depression, it fueled the irrational despotism and militarism that preceded the outbreak of World War II.
In the aftermath of World War II, policymakers appeared to have learned their lesson from the disastrous Smoot-Hawley experience. Sadly, the specter of protectionism reared its ugly head during George W. Bush’s administration in the early 2000s.
Under Bush’s watch, the United States imposed steel tariffs of up to 30 percent in 2002, in an attempt to shield the industry from international competition. Economically speaking, this policy did not have as catastrophic of an effect on the American economy as the Smoot-Hawley tariffs did given the narrower scope of the Bush tariffs.
- 49 percent of firms dependent on steel consumption reported difficulties in obtaining steel;
- 32 percent of manufacturers, most notably automakers, reported delays in production;
- 19 percent of firms passed increased steel costs to customers.
But the impact was not just confined to the United States. Like clockwork, the European Union, Japan, Korea, China, and Brazil filed grievances at the World Trade Organization (WTO), which gave these countries the green light to retaliate against the United States with sanctions of their own.
International backlash was so strong that the Bush administration eventually backed down and had the sense to lift these tariffs in 2003.
Despite America’s troubled history of flirting with destructive tariff policies, the Trump administration believes that it can still defy the laws of economic by relentlessly pushing for steel tariffs.
Even though tariffs have a proven track record of failure, why do policymakers insist on bringing these failed polices back from the grave?
The harsh reality is that tariffs yield clear benefits for the narrow interest groups that promote them. Public-choice theory sheds some interesting light on how interest groups can mobilize rapidly in pushing for policies that hurt the rest of the populace.
It argues that small, yet powerful interest groups—steelmakers in this case—pursue concentrated benefits with dispersed costs that are not easily visible to the naked eye.
French economist Frédéric Bastiat’s sage wisdom from his essay What Is Seen and What Is Not Seen comes in handy when trying to understand the negative effects of tariff policy. When a tariff is implemented, what is seen is the increased domestic production of the good receiving protection, but what is not seen is the increased cost of goods that use steel inputs. In turn, these costs are passed on to consumers at the checkout line whenever they buy steel-using goods.
While the increased costs seem trivial at first, economist Richard Ebeling illustrates how these higher prices “will sum up into tens of millions of dollars of added revenues for the domestic steel producers.”
Because each individual consumer has to shoulder slightly higher prices due to tariff increases, there is very little incentive for them to rally against the increased tariff rates. On the other hand, powerful interest groups like steelmakers enjoy a competitive advantage in coordinating political action. Until consumers are able to effectively band together, the rent-seeking gravy train will continue to roll unabated for protectionist interests.
Calling a Spade a Spade
In the political sphere, pundits will rationalize sub-optimal economic policies in the name of protecting workers or under dubious premises like national security. Regardless of the rationale behind protectionist measures, the fact remains that tariffs have no real economic justification, and their negative effects are simply too palpable to ignore.
No matter how one slices it, tariffs always morph into taxes on consumers. On top of that, there is no need to repeat the dreaded history of the 1930s trade wars that played a significant role in setting the stage for the bloodiest conflict in human history.
The United States, and the rest of the world for that matter, would reap innumerable benefits from adopting free trade and leaving tariffs where they rightfully belong: in the dustbin of history. As leader of the free world, the United States should lead the way by repealing all forms of tariffs.