Why tariffs hurt our economy, but are still used

Published 8:18 pm Sunday, March 11, 2018

Tariffs, another name for taxes on trade, are a favorite tool of politicians to get some extra revenue, whip up some economic nationalist sentiment, and provide the promise of “protecting” American business.  But history has proved how disastrous such tariffs can be for our whole economy.  It will be the same with the new tariffs on steel and aluminum, until President Trump learns the same hard lesson as Andrew Jackson, Martin Van Buren, Ulysses Grant, Rutherford B. Hayes, Benjamin Harrison, Grover Cleveland, Herbert Hoover, Richard Nixon, and George W. Bush had to discover.

While the 1833 Tariff (opposed by the South) is credited with helping America raise enough revenue to balance the budget, the following Panic of 1837 exposed America’s economic weakness, and inhibited the U.S. ability to trade its way out of the problem. It also bequeathed the country an issue that divided the North and South, helping contribute to the country’s Civil War years later.

Most think the Great Depression was America’s worst economic catastrophe, but it was really the Panic of 1873, which lasted six years, as opposed to the Great Depression, which lasted for four years.  And while the trigger event may have involved railroad speculation and inflation, the long-standing policy of maintaining high tariffs during and after the Civil War certainly played a major factor.  These were designed to pay off the war, but merely held back America’s economic potential with a divisiveness that hurt the country’s ability to make trade partners.

The Panic of 1893-1894 hit America as hard as the Great Depression.  A major factor in this sharp and severe recession was the imposition of a strong tariff bill, the McKinley Tariff Bill.  As with all tariffs, the bill had questionable benefits, but clear increases in prices on all Americans and paved the way for foreign retaliation on American products, and the loss of 93 Republican seats.  As the bill slowly strangled the U.S. economy, it was replaced with the Wilson-Gorman Tariff Act, which lowered American tariffs, ending the downturn, ironically paving the way for McKinley’s victory in the next election, proving voters have short memories.

Did tariffs cause the Great Depression? My education students learn in their textbooks that it was the stock market crash that caused that economic calamity in 1929, and the massive tariff bill, the “Smoot-Hawley Tariff Act” (of Ferris Bueller fame) was signed into law in 1930. But that fails to note that (a) the Smoot-Hawley bill was working its way through Congress in 1929, before the crash, and (b) markets panicked at the realization that a trade war and higher prices were heading toward America, according to Fortune Magazine. 

In fact, a report that the tariffs would be far bigger than originally planned came out a day before the market tanked writes David Z. Morris, author of the Fortune report. Furthermore, those deleterious tariffs contributed to drag down the U.S. economy, as global trade fell by 66 percent between 1929 and 1934, another point made by Morris. The trade war it started undermined Western cooperation, enabling Adolf Hitler to take advantage of the situation.

While Richard Nixon’s ill-fated 1971 tariff binge did not produce a similar market crash, most rate the decade’s economic performance as sluggish, a strong contrast to the impressive growth of the 1960s, 1980s and 1990s, which were accompanied by American reductions in tariffs.

Such trends occurred until George W. Bush’s brief foray into tariffs, when he imposed his own taxes on foreign steel. While these were rescinded a short time later, the damage had been done. Not only had the economy lost an estimated 200,000 jobs and billions of dollars in just a year, but also confidence in the president’s ability to manage the economy was gone.  As a result, when the stock market collapsed, few trusted the president to handle the situation effectively, remembering his poorly conceived tariff policy from earlier in his administration.

It’s clear that tariffs protect a few industries and some jobs, but risk others to exposure in terms of higher prices and retaliation from other countries, hurting our exports. Consumers wind up having to pay more for products, leading to recessions or worse. Hopefully, President Trump will come to his senses and remove these tariffs, before it’s too late.