Why Blanket Tariffs Are a Bad Idea

Last week, U.S. President-elect Donald Trump pledged to levy tariffs on America’s two leading trade partners, while increasing tariffs on its leading adversary, which also happens to be the nation’s third largest trade partner.

Posting on Truth Social, Mr. Trump vowed to impose tariffs of 25% on all imports from Mexico and Canada, which account for 16% and 14% of U.S. foreign trade, respectively. He also signaled his intention to levy an additional 10% in tariffs on Chinese imports. Previously, the President-elect announced that he would place tariffs of up to 20% on all goods imported to the United States, regardless of their state of origin, and up to 60% on Chinese imports.

Tariffs, which best can be described as import taxes, generally are meant to bolster domestic production by giving manufacturers and producers a “homefield advantage” in the market place. In September, Mr. Trump called tariffs “the greatest thing ever invented” and has said that tariffs on imported goods will help to create jobs, reduce the deficit, and lower food costs in America. However, his reasons for placing tariffs on goods from Mexico and Canada were different.

Explaining why the President-elect intends to punish the United States’ two largest (and nearest) trade partners, Mr. Trump posted, “This Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!”

Newly-elected Mexican President Claudia Sheinbaum pushed back the following day, reading from a letter she had written to Mr. Trump in response. In part, the letter stated, “… neither threats nor tariffs will solve the issue of migration or drug consumption. Imposing one tariff would mean another comes in response, continuing like this until we put shared companies at?risk.”

Strategically targeted tariffs can be an effective tool.

Imports of goods at bargain basement prices can seriously hurt or destroy domestic production of similar products. Such was the case in 2017 and 2018, when importers were flooding the United States with cheap steel and aluminum. The Trump administration responded by slapping tariffs of 25% on imported steel and 10% on imported aluminum. Several countries were excluded from the tariffs, including Australia, Canada, and Mexico, and the United States established quotas for steel imports from Brazil and South Korea and quotas for steel and aluminum imports from Argentina.

According to a report issued by the Economic Policy Institute, domestic aluminum production and processing increased nearly 10% in the first eight months following the imposition of tariffs, and iron and steel production rose almost 7% during the same time period.

If tariffs were implemented in only one sector or by only one trade partner, they could indeed be the “greatest thing ever invented” in the realm of economics. Unfortunately, that is not the way the real world usually works. Tariffs invoked by one country inevitably lead to retaliatory tariffs, as President Sheinbaum noted.

After the 1929 stock market crash, the United States enacted the Tariff Act of 1930, also known as the Hawley-Smoot Tariff. The bill was intended to provide revenue, regulate foreign trade, encourage increased U.S. production, and protect jobs.

Signed into law by President Herbert Hoover, the Hawley-Smoot Tariff was the result of a protectionist movement in Congress and isolationist sentiment in the United States. While the bill was meant to protect domestic producers, other nations quickly responded in kind, imposing retaliatory tariffs of their own on U.S. exports. This effectively made it prohibitive for American producers to sell their goods abroad. American foreign trade plummeted by some 67%, plunging the nation deeper into the economic crisis.

Rather than seeking international cooperation to address the growing depression, the world’s nations adopted a “beggar-thy-neighbor” approach. As each country attempted to protect itself economically, it did so at the expense of its trade partners, which only served to shrink the global economy and exacerbate the effects of the Great Depression.

In addition to imposing tariffs and quotas on imports, a number of nations devalued their own currencies in an effort to become more competitive in the global market. As countries attempted to outmaneuver each other, the result was a race to the bottom in terms of world currency values, bringing about inflation.

The result of these actions together worked to shrink the value of global trade by a staggering four-fifths, increased trade barriers, and devalued currencies around the world. The United States itself saw the value of its exports shrink by 71% between 1929 and 1933.

No one is predicting another Great Depression as a result of the President-elect’s proposed tariffs, but as noted above, Mexico already has suggested imposing retaliatory tariffs if the next administration proceeds with plans to place a 25% tariff on imports from the U.S.’s southern neighbor.

According to analysis by the nonpartisan Tax Foundation, the proposed tariffs on Mexico, Canada, and China could generate $1.2 trillion in tax revenue if imposed on a permanent basis. However, the foundation projects that the tariffs would reduce America’s GDP by .4% and eliminate 344,900 jobs in the United States. These estimates do not take into account the effects of retaliatory tariffs or additional issues resulting from a new trade war. Citing academic and governmental studies, the Tax Foundation concludes that the net effect of tariffs imposed and/or renewed during the previous Trump and the current Biden administration has been to increase prices and decrease output and employment.

Numerous economists have pointed to the potential for negative consequences tariffs on imports from Mexico and Canada could have, given how intertwined the three economies and supply chains are. Additionally, the imposition of tariffs would run counter to the United States-Mexico-Canada Agreement (USMCA) that was negotiated by the previous Trump administration and which replaced the North American Free Trade Agreement (NAFTA). The USMCA, which took effect on July 1, 2020, has served to increase trade and investment among the three nations.

As with most things in life, moderation is the key to success. When it comes to tariffs, the more surgical, the better. Better yet, seek a second opinion before acting.

?To see more of my columns, please visit https://neaproini.gr/author/scott-rye/

Captain Scott Rye, USN (Ret.), is a former correspondent for Daily Shipping Guide, the former long-time editor of Alabama Seaport magazine, and the author of Of Men & Ships: The Best Sea Tales and Men & Ships of the Civil War.

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