With Donald Trump possibly closing in on a second term of office, the global business community will likely see, if he takes the election, a return to American use of tariffs. During his previous term Trump used tariffs, or the threat of them, as a protective device, a negotiating tool, or as a weapon depending on the situation and the players involved.
Naturally the implementation of tariffs, taxes on certain goods imported from either all or certain countries, of any sort will have ripple effects in the economy of the United States and in the world at large. As is this nation’s wont, the question of tariffs has ossified in the general political landscape. Since the 30s, conservatives have embraced the notion of the good of free trade as an economic postulate, objectively true in all situations.
Previous to the Great Depression, however, the Republican Party, and before it the Whigs, the John Quincy Adams supporting National Republicans, and the Alexander Hamilton led Federalists supported establishing tariffs to protect young American industries. Eventually this ideal of protection extended to that of the jobs created by these industries – especially after the advent of universal white male suffrage in the 1830s and the vote for all male adults after the Civil War.
Historically Thomas Jefferson and his political allies, who formed what would be called by and after the 1830s, the Democratic Party, had opposed tariffs. They cited two important issues that stemmed from imposition
First, tariffs being taxes, they raise the price of goods. Foreign produced goods inevitably cost more when tariffs are applied as companies importing the goods to sell must pay the tax on the import. Anytime a tax is imposed on a private business that offers goods or services, that tax is actually paid by the consumer or client.
Also if the price of an imported good rises high enough due to tariffs, the price of competing goods produced domestically may also rise to a level just shy of the import.
The pre Civil War Democratic Party also opposed tariffs due to retaliation from other countries.
Democrats argued that tariffs passed to protect industry and manufacturing helped only one section, the north, while producing adverse effects in the South. Before the Civil War British manufacturing dominated global markets to the point that, in a completely free trade environment, they could make a good, ship it across the Atlantic, and sell it in the United States more cheaply than an American business could.
Tariffs pushed the price of British made goods higher than American, giving the domestic good a price advantage.
In the same time period the United States, particularly the South, could raise and produce agricultural crops and sell them more cheaply in Britain than British farmers. American cotton also had an advantage over the British product grown in India. Britain retaliated against American manufacturing tariffs by raising its own tariffs on products from American agriculture.
Farmers, mostly in the South, saw their imports drop at the same time as manufactured goods they needed rose in price. This helped to widen the sectional schism that led to the Civil War because the South perceived that Congress and the federal government favored the interests of the North over the South. The tariff issue created the 1832 Nullification Crisis where South Carolina – until forced into compliance – refused to enforce the law after their state legislature “nullified” the federal act.
This set the tone of state and sectional relations that continued to degenerate until the Civil War.
The Civil War until the Great Depression showed the power of tariffs to drive economic growth. After the Democrats ceded their voice in Congress via the secession of most Democratic states, Republicans passed a series of acts that raised the tariff, promoted railroad development, and established the system of land grant universities. This came as an integrated plan to elevate the US over Britain and Germany as the world’s leading manufacturing power.
After World War I the United States mostly achieved that goal. Republicans specifically, but the nation at large as well, supported continuing the tariffs because they had worked thus far. They figured, like the classical engineering admonition, “if it ain’t broke, don’t fix it” as the US manufacturing economy powered through the early and mid 20s.
The world, however, had changed.
European economies sank into a postwar morass, partly because of the effects of the conflict and partly because of the unreasonable sanctions placed on Germany. Russia degenerated under Vladimir Lenin’s destructive form of Marxist communism. A perfect international economic storm led to the economic crash and Depression which, unfortunately, President Herbert Hoover and Congress chose to react to with some of the highest tariffs ever imposed – the Smoot-Hawley Tariff. Tariffs multiplied among world nations and brought international trade levels down significantly.
After World War II, with the rest of the industrialized world flattened by war, Americans freed from most economic competition embraced free trade. Outside of labor unions, a consensus emerged as to the value of free trade and its beneficial effects on prices and commerce.
Like Britain after Adam Smith taught free trade principles in his 1776 work Wealth of Nations, the United States embraced the notion of free trade tightest when it worked best to the American advantage. There is nothing wrong, greedy, or immoral about nations pursuing their advantage, but that should never indicate that this idea is a “works in all cases whatsoever” principle.
Over time, other nations have sought to subvert the general guidelines that underlie healthy free trade. Governments of other nations have, from time to time, embarked on policies to help their own industries export to the US under free trade terms, but sell under the price necessary to make a profit. Until Trump, the United States preferred to ignore these efforts to establish industry at the expense of domestic businesses.
By the 21st century, Red China was well on its way to establishing itself as a manufacturing giant in its own right, moving beyond cheap, and often illegal, knockoffs of US made goods to developing a steel industry eclipsing America’s in growth. They used massive government subsidies, the forced labor of unpaid prisoners and barely paid children, and other end runs to undercut the United States.
When free traders play by Queensbury Rules and nations that trade work together in other fields instead of against each other’s interests, Adam Smith’s vision works well as the ideal model. In the 21st century, America’s main geopolitical rival is building economic strength as a foundation for expansion of its power. That still would not be threatening if Red China was also not continually moving troops and ships into the land and sea territory of its neighbors, especially India, Vietnam, and the Philippines.
And, of course, Red China remains a significant threat to the freedom of those living under the Nationalist Chinese government on Taiwan.
The history of tariffs in the modern world and in United States history demonstrates that both they and free trade principles must both remain in the policy toolkit, to be used when needed.
Imposing tariffs comes at a cost for sure. Allegheny Wood Products moved heavily into Red China’s market as its middle class demand for items made of finished wood surged. Trump’s tariffs hit a company already reeling from other pressures and did contribute to its shutdown.
That said, the company putting some of AWP’s old facilities in Petersburg and elsewhere back on line, Canada’s Goodfellow Inc., refused to take the risk of working so heavily with one of the West’s main rivals and focused on expanding its markets in North America, which proved wise and profitable for them.
A new Great Power based international system is replacing the two superpower model of the post World War II era. The United States must use the powers at its disposal to protect not just the American economy, but other US interests as well.
And tariffs appear to be an important part of that strategy going forward.
