Why Trump’s Tariffs Will Make America Suffer Again
A course in basic economics for The Donald.
Trump should love the benefits of free trade since he is profiting off of them nicely. In the Trump store on Fifth Avenue in New York, t-shirts, ties, and other goods for sale are produced in China, Haiti, Nicaragua, and Lesotho.
But ironically, it is Trump who is flaunting a protectionist trade policy, proposing massive new tariffs. “Foreigners are killing us on trade,” declares Trump, further arguing that trade has “been the greatest theft in the history of the world.”
Trump University (T.U.) clearly never taught economics or history; perhaps if it had, Trump would have learned about the benefits of trade and the history of mercantilism.
Even the liberal New York Times mocks Trump for his uneducated rhetoric, writing in a recent article:
[Trump’s] sentiment would conform nicely to the worldview of the first Queen Elizabeth of 16th Century England, to the 17th-century court of Louis XIV, or to Prussia’s Iron Chancellor, Otto von Bismarck, in the 19th century. The great powers of bygone centuries subscribed to the economic theory of mercantilism, ‘wherein we must ever observe this rule: to sell more to strangers yearly than we consume of theirs in value.’
In 1776, the world’s first economist, Scottish philosopher Adam Smith, changed much of the prevailing protectionist thinking of his day with his famous treatise, “The Wealth of Nations.” Smith caught on to the benefits of free trade early: “In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest.” In other words, a person may specialize in producing a certain good, allowing that person to have a comparative advantage over others who may produce that same good.
Our market still works this way today. Consider your iPhone, which was manufactured in China. The U.S. and China can both make Apple iPhones. However, the U.S. has a comparative advantage in technological engineering, whereas China has more abundant, less expensive labor supply in manufacturing. The world gains when the U.S. utilizes its resources to export advanced innovations, while importing the final manufactured product, the iPhone. This allows Apple to sell you an iPhone more cheaply, and is the reason iPhones have not tripled in price.
Smith’s advice has not always been heeded in America, particularly during the Great Depression when there was significant demand from the manufacturing and agricultural industries to cut off competition from abroad. Economic thought gave way to emotion, and the U.S. enacted the largest – and most harmful – tariff bill ever. Named after the two congressmen who sponsored it, Representative Hawley and Senator Smoot, the bill became known as Smoot-Hawley, placing prohibitive tariffs on nearly 20,000 goods.
And Smoot-Hawley “worked;” two years after its passage, imports were reduced by 40 percent.
However, there were severe and unintended consequences. In retaliation, the rest of the world also imposed tariffs or trade barriers on United States exports. France and Italy imposed auto tariffs on American-made cars. Canada raised tariffs on U.S. goods three separate times. The Swiss were so furious over the U.S.-imposed duty on watches that they boycotted U.S. imports altogether. The Depression worsened and both congressmen lost their jobs only two years after the bill’s passage.
Trump has been right to acknowledge that America has been running a large trade deficit. In 2014, America sent $2.4 trillion in exports abroad, yet imported nearly $2.9 trillion in goods and services. But the solution is never one-sided; reducing imports by increasing tariffs will also reduce American exports, as history has demonstrated.
Protectionist policies do not fare any better today. In 2009, for example, sales of Chinese tires had increased to a booming 49 million tires. In an attempt to push sales back to American-made tires, President Obama imposed a “Trump-loving” (Trump is calling for a 45 percent tariff on Chinese imports) tariff of 35 percent on Chinese tires.
According to the White House, the tariff preserved nearly 1,000 American jobs. But at what expense? According to the Peterson Institute for International Economics, the tariff imposed by the Obama administration resulted in Americans spending $1.1 billion more on tires than they would have otherwise.
But it doesn’t stop there. In a nearly identical reaction to the Smoot-Hawley Act almost a century ago, the Obama tariff triggered a retaliatory response by China, in which China slapped an equally high tariff on imports of American chicken — enough to cost American poultry exporters more than $1 billion in sales.
So the tariffs imposed by Obama to save 1,000 American jobs ended up costing the U.S. economy $2.1 billion — or $2.1 million per job saved!
Protectionist policies as proposed by Obama, and now Trump, are not the answer — not in 1930, not in 2009, and certainly not in 2016.
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