Here is how I see tariffs on the other hand...
This is the argument that Professor Walter Williams made.
Imagine that you and I are in a rowboat. I commit the stupid act of shooting a hole in my end of the boat. Would it be intelligent for you to respond by shooting a hole in your end of the boat?
Or, imagine I were a politician and told you that the Russian, Chinese, Korean, Brazilian and German governments were ripping off their citizens by, on the one hand, taxing them to provide subsidies to their domestic steel industries and, on the other, erecting tariff barriers forcing them to pay higher prices for products made with or containing steel.
Would you deem it responsible or intelligent of me to propose retaliatory tariff policy, whereby Americans are ripped off until Russia, China, Korea, Brazilian and German governments stop ripping off their citizens?
Both of these scenarios are applicable to the Bush administration’s 30 percent steel tariffs imposed when he was president. Those tariffs caused the domestic price for some steel products, such as hot-rolled steel, to rise by as much as 40 percent. The clear beneficiaries of the Bush steel tariffs were steel industry executives, stockholders and the approximately 1,700 steelworker jobs that were saved. Well and good, we SEE the jobs saved. But what about the effects that WE DON’T SEE?
Frederic Bastiat said long ago.... “Let us accustom ourselves, then, to avoid judging of things by what is seen only, but to judge of them by that which is not seen.”
Tariff policy beneficiaries are always visible, but its victims are mostly invisible. Politicians love this. The reason is simple: The beneficiaries know for whom to cast their ballots, and the victims don’t know whom to blame for their calamity.
According to a study by the Institute for International Economics, saving those 1,700 jobs in the steel industry cost American consumers $800,000 in the form of higher prices for each steelworker job saved. That’s just the monetary side of the picture. According to a study commissioned by the Consuming Industries Trade Action Association, higher steel prices have caused at least 4,500 job losses in no fewer than 16 states — over 19,000 jobs in California, 16,000 in Texas, and 10,000 in Ohio, Michigan and Illinois. In other words, industries that use steel are forced to pay higher prices, the products they produce become less competitive and they must lay off workers.
Article I, Section 8 of the U.S. Constitution says Congress has the authority “To regulate commerce with foreign nations, and among the several states, and with the Indian tribes.” It wasn’t the Framers’ intent to give one group of Americans, such as those in the steel industry, the power to use Congress tax other Americans.
When Congress creates a special advantage for some Americans, it must of necessity come at the expense of other Americans. Those Americans who’re harmed, such as steel-using industries, descend on Congress, asking for some kind of relief for themselves.
Why can’t the same argument apply to OTHER industries we try to protect with tariffs?
Would you deem it responsible or intelligent of me to propose retaliatory tariff policy, whereby Americans are ripped off until Russia, China, Korea, Brazilian and German governments stop ripping off their citizens?
Forget about ripping off their citizens. What does this do to our access to their domestic markets and their access to our markets?
Such policies make our exports more expensive and their exports cheaper. Why would we put up with such an imbalance?
“Here is how I see tariffs on the other hand...”
I’m talking about long term tariff strategy, executed over decades, not a one time short term punitive action like Bush took for steel, or one off protective tariffs targeted to benefit a specific industry.
When you look at the broad sweep of US history, the US economy has prospered, and experienced its highest growth rates, during periods of sustained broad based tariffs of approximately 30%. In the 19th century, the tariff was used to fund the federal government, there were no income taxes.
Consider from a free market perspective the tariff as a fee for foreign factories to have access to the domestic market. Domestic companies pay a corporate tax rate of 32% or in the case of small companies pay the marginal tax rate of the owner which is likely at least 25%. These taxes pay for the public infrastructure (roads, waterways, bridges), the protection of the US Coast Guard and US Navy, the legal system which protects contracts and intellectual property, as well as the scale benefits which accrue to companies selling in a large homogeneous open national market instead of individual state regulated markets. To charge domestic producers taxes for participating in this market and not charging foreign factories and producers for access to the same market puts the domestic factories at a significant disadvantage and is effectively an economic subsidy for foreign producers. A 30% tariff puts domestic and foreign manufacturers accessing the US market on an equal footing from the perspective of government taxation and regulation. Both taxes and tariffs are an externally imposed government fee for participation in the marketplace.
Tariffs also serve a national security interest to the extent they discourage foreign nations from targeting specific industries (as China has done overtly) and through government subsidies underprices domestic producers in an effort to drive them out of business and capture the market. During the “free market” market heyday of the 1990’s and early 2000’s I ran a domestic division of a large US corporation competing in a China targeted industry. Our Chinese competitors received interest free loans for capital from Chinese government controlled banks while my company had an effective 13% cost of capital (blended bank and equity). In addition the Chinese government paid a 15% rebate to the competing factories on the value of products exported. In addition, the Chinese factories enjoyed a lower effective tax rate, less regulatory intrusion (environmental, labor rules, health and safety) before we even get to the labor cost differential. Had we been on a level, unsubsidized playing field, we could have stayed in business despite the labor cost differences. However, we could not compete with subsidized industries and the US government would do nothing since we were not considered a “strategic industry”. That industry, which did employ 2 million domestic manufacturing and manufacturing support workers is now virtually gone. The remaining high value R&D jobs associated with that industry are now being exported as well. A 30% tariff would have ensured those jobs stayed in the US. In fact, those jobs would have stayed with a 15% tariff.
Lost factories and supply chains make the US more vulnerable from a national security perspective. The US was almost fully self sufficient at the beginning of WWII. Its consumer goods factories were quickly converted to war production, allowing the nation to defend itself and defeat its enemies before they could develop weapons of mass destruction and delivery systems to attack the US civilian population directly. Today, if this nation were engage in a conflict of this magnitude, the domestic factories do not exist to convert to war production.
You stated, “Tariff policy beneficiaries are always visible, but its victims are mostly invisible.” I disagree. Visit rural towns throughout the US that lost textile, apparel, furniture, and consumer products assembly plants to heavily subsidized Asian factories. Once vibrant towns with middle class jobs are littered with boarded up deteriorating buildings. Counties which once enjoyed low unemployment rates, with a mix of agriculture and light manufacturing, now have high unemployment rates and the associated issues of drug abuse, alcoholism, and crime that go with large populations of idle people. The higher social costs are paid for by US citizens, and domestic producers through taxes, not the foreign factories who pay no taxes or tariffs.
Returning to the historical perspective, the current experiment with negligible tariff rates (today the US realizes an average 1.3% tariff rate on imports compared to 7.3% for China) has been underway for 25 years. During that time period the nation lost millions of middle class jobs and a significant portion of its manufacturing infrastructure. During that time period the average income of the American household has declined for the first time in US history.
In addition the shifting of investment from US industry to China has resulted in the buildup of a major economic and military competitor which daily engages in direct cyberwarfare, economic warfare, and intellectual property theft. That nation’s leaders have from time to time openly communicated a desire to defeat and humiliate the US militarily. The emergence of this threat was 100% due to a US trade policy which favors Chinese imports, as well as investment in building Chinese factories, at the expense of American industry and workers.
I challenge you to show me the benefits to the American economy and American citizen of the last 25 years of free trade. I see declining standards of living, fewer middle class jobs, high social costs for government programs supporting the unemployed and underemployed, and loss of economic power which over time will equate to loss of military power and weakened national security. Certainly the members of the 1%, the bankers at Goldman Sachs, the private equity firms, and the other Wall Street players who looted American industry and helped fund the building of Asian factories benefited. However, the American middle class of today, as well as future generations, were hurt immensely.
Your proof consists of allegories, academic theories, and one short term retaliatory measure by the Bush administration in one industry in response to subsidized dumping by foreign companies. In fact I view the claims of the pro free trade Institute of International Economics you cite as no different than our own government’s propaganda that there is no inflation today even though they selectively and purposefully eliminate rising food and energy prices from the inflation statistics. Or the government unemployment rate statistics which conveniently count as unemployed only those people the government claims are looking for work, not the millions of people without jobs.
Open your eyes and look at nearly 250 years of American history. Our country, with its abundant resources and entrepreneurial spirit thrived economically during periods of high tariffs which promoted a self sustaining domestic market. During the past 25 years of open markets, foreign government subsidized imports, and zero costs imposed on foreign factories in return for access to the US market, we’ve seen deindustrialization, economic decline, a shrinking middle class, and a declining standard of living. Academic theories don’t employ people. Government capitalized foreign factories exporting subsidized goods don’t provide good middle class jobs to American workers in anywhere near the quantity of domestic factories producing the same goods. Foreign companies paying no fees for access to the US market are at a tremendous competitive advantage when competing in our domestic market with domestic companies paying 30% + tax rates, not to mention abiding by costly regulations the foreign factories do not have to meet.
The free market solution is simple. Apply a flat tariff on all foreign goods equal to the corporate tax rate. A flat across the board tariff does not favor any industry. Call it a market access fee. Foreign producers should pay for access to the market if domestic producers are charged for the same privilege.
Levy a 30% to 35% tariff on all imports and you’ll see investment in US manufacturing skyrocket and the middle class manufacturing jobs return. Certainly in the short term there will be some retaliation. However, what is China going to do to retaliate against an across the board tariff. It can’t stop shipping goods. If it chooses to selectively punish some US industries, the US government can take the same action against specific Chinese industries. As new efficient US factories are built and come on line, Chinese factories will be forced to lower prices to compete (just as US factories had to compete with subsidized Chinese factories). This will squeeze margins and reduce tax revenue the Chinese government uses to subsidize industries and pay for its military buildup. It is a win win proposition for the US.
The free trade alternative we are pursuing is the path to third world status for this nation and ultimately loss of our freedom to other nations. I vote for returning to the successful tariff policies adopted by those far sighted individuals who build the US into the greatest industrial power on the planet in the 19th century than the progressive academic free market theories that are leading us to our ruin.
From 1865 to 1900, the average tariff paid (not the posted tariff, the tariff paid) on imported goods into the US exceeded 27% in every year. In 1990 the average tariff paid was 2.8% and today the average tariff paid is 1.3%. Today foreign factories pay less (as a percentage of product value) for access to the US market than the American consumer pays in sales taxes to purchase those same products.
The US enjoyed unprecedented industrial growth and economic expansion in the 35 years following the Civil War and became the largest industrial power on the planet. From 1865 to 1900 the average income of non farm workers grew by 75% and grew another 33% by 1918. The number of farms tripled in the nation from 1860 to 1905. GNP grew 600% from 1865-1900. In 1865 there were 35,000 miles of railroad track in the US, by 1900 193,000 miles. US entrepreneurs and inventors created entire industries and innovations — petroleum, electric lighting, camera, typewriter, phonograph, motion pictures, telephone, the department store, national discount store chains (Woolworth), mail order catalogs (Sears), prepackaged foods (Kellogg, Post), refrigeration, and the corporate organization structure. Manned flight would follow in 1903.
I suggest the 35 year period of record economic growth from 1865-1900 is proof high protective tariffs can facilitate a period of rapid economic expansion and high innovation. I would also suggest the past 25 years of virtually zero tariffs, with the resulting deindustrialization, have been a disaster for the US economy and the average working American who has seen a decline in his/her standard of living for the first time in US history.
—Son Of The south