The Truth About Tariffs

President Hoover signed the Smoot-Hawley Tariff Bill on June 17, 1930. A cartoon during the period shows how Canada was the first to retaliate.

On March 1, 2018 the White House announced new tariffs, proposed to be 25% on steel and 10% on aluminum. This follows an announcement on January 23, 2018 that there will be new tariffs on washing machines and solar panels. The uproar and backlash from within the U.S. and around the world was fierce, culminating in the resignation of White House chief economic advisor Gary Cohn on March 6, 2018. 

Are tariffs good for jobs, workers and manufacturing? Will tariffs solve our trade deficit, which is massive – higher than it has been in a decade – at $800 billion in 2017? Will tariffs plunge the U.S. into a recession?

Source: Census.gov.

To answer these questions, I turned to history and the experts. Below are the primary considerations, and below that additional information.

1. The Tariff Act of 1930 (The Smoot-Hawley Tariff) and the Great Depression.
2. GATT = Economic Expansion.
3. Jobs and the Economy.
4. Are We Hurting China or Canada?
5. National Security Interests.
6. Solar Tariffs.
7. The Trade Deficit

 
And here are more details.
 
1.    The Tariff Act of 1930 (The Smoot-Hawley Tariff) and the Great Depression.
Economists debate whether or not The Tariff Act of 1930 is a primary cause of the Great Depression. The act was signed into law on June 17, 1930, after an 18-month long debate that had begun in early 1929. Black Monday & Tuesday, with combined losses of 25%, were on Oct. 28-29, 1929. However, economists concur that, at minimum, tariffs exacerbated and prolonged the Great Depression – one of the worst economic periods in American history.

2.    GATT = Economic Expansion.
The General Agreement on Tariffs and Trade Agreement was enacted in the wake of World War II, beginning on January 1, 1948. The overall purpose of GATT was to promote international trade by reducing tariffs and quotas. In the wake of this, the U.S. economy prospered and began a general expansion as the world’s economic leader that spanned decades. (It was only recently that China and the European Union surpassed the U.S. economy as the world’s economic leaders.)
 
3.    Jobs and the Economy.
As Nobel Prize winning economist Robert Shiller (professor at Yale University) said on CNBC on March 2, 2018, “Tariffs hurt most people.” Sure, you can help the steel and aluminum industries, but you end up hurting the auto, airplane, construction and beer industries by making steel and aluminum more expensive. Extra costs and burdens on those industries could mean layoffs and canceled production.
 
4.    Are We Hurting China or Canada?
Steel imports from China are rather small – at 2% or under, while the U.S. imports from Canada are much larger – at 12.5%. Brazil, South Korea, Mexico, Russia, Turkey and Japan are the next in line. (Source: International Trade Administration)

5.    National Security Interests.
The U.S. imports about 1/3 of its steel and most of its aluminum. The big winners of tariffs on these commodities are the producers and manufacturers, but not the U.S. public. In general, the public and the U.S. labor force, will see negative ramifications from tariffs, with higher prices and corporate belt-tightening in many downstream steel industries (including potential layoffs of workers).“Low tariffs help the world to organize itself better,” Robert Shiller said. He used the example of Brits hiking a tariff on Portuguese wine and then trying to produce their own wine in a country where grapes do not grow well. “You just end up with bad wine,” he said.
 
6.    Solar Tariffs.
Tom Warner, the CEO of Sunpower, a US-based solar company, warns that projects have been canceled, costs are soaring and he’ll have to cut back instead of expanding employment – all as a result of the solar tariffs. In his 4th quarter and full year earnings report, which was released on February 14, 2018, he wrote, “Unfortunately, we are already seeing a negative near-term impact from the ruling as the increased costs due to import tariffs have delayed certain 2018 projects and made other projects uneconomical. We have also put our planned $20 million U.S. employment expansion on hold and are considering other significant cost saving initiatives to lower our overall expense structure and improve our financial performance."
 
7.    The Trade Deficit
On March 7, 2018, a Trump Tweet said, “Last year we had a trade deficit of almost $800 billion dollars. Bad policy and leadership. Must WIN again!” That Tweet indicates so much. While the trade deficit number is accurate, the idea that steel tariffs will improve it is very misleading. According to the International Trade Administration, steel imports amounted to only 1% of the U.S. trade deficit. Therefore, rationalizing the tariffs on steel imports as a way to reduce the trade deficit is a specious rhetoric. So, why announce the tariff this month, and follow it with a tweet about winning again? There will be a hotly contested special election on March 13, 2018 in the 12th district of Pennsylvania – a state that was won in 2016 by the 45th President, and one that benefits from the steel and aluminum tariffs.
 
It appears that the only fans of the steel and aluminum tariffs are the heads of those industries and the politicians who will win votes by supporting them. It’s hard to find a fan of the solar tariffs. Gary Cohn has given the world a strong indicator of his opinion of the tariffs by walking out the door.

The truth about tariffs is that just as today, economists banned together in 1929 to warn President Hoover of the ramifications of imposing tariffs to try and resuscitate a weak economy. 1,028 economists signed a letter protesting against trade restrictions with solid data supporting their stance. The data and science of free trade is one of the most clear, tried and true rules of economics, with dire examples, like the Great Depression, of what happens when we ignore those rules.

The only questions seem to be:
 
Will the current Administration Continue with its Protectionist Policies?
Will Tariffs Sink the U.S. Economy?
Will Wall Street Enjoy a Spring Rally or Respond with a Correction?
Was this all in an effort to win a Pennsylvania House seat for the Republicans?
 
The coming days and months will answer those questions.