The Tax Act of 1789 was one of the 1st substantive acts of the new nation and was signed into law by President Washington on July 4th of that year. It placed an 8% tax on all imported goods. Tariffs only existed on foreign goods and there is a constitutional provision that states cannot tax the goods of another state (the European Union was eventually structured after this provision in 1958).
Tariffs were the principal source of the US government’s income (sometimes as much as 90%) prior to the imposition of an income tax in 1917. There have been many positions on tariffs. Abe Lincoln stated that he didn’t know much about trade but knew that if an American bought a coat from an English coat maker, the American had the coat and the Englishman had the money. However, if an American bought a coat from another American, the American had the coat and the other American had the money. It seems fairly intuitive at first, however, what Lincoln did not take into account was the economic concept of comparative advantage. Essentially, this is when a country can produce a good with the lowest opportunity cost. To keep it simple with an example, it means that New England States are better off growing apple and potatoes and trading with Florida for oranges and bananas. Likewise, China has cheap labor and insufficient natural resources for its 1.3 billion population, whereas the US has technology and resources, hence trade with China, and given its inexpensive cost to produce many goods, electronics clothes etc, the huge trade imbalance (see chart).
Tariffs were the principal source of the US government’s income (sometimes as much as 90%) prior to the imposition of an income tax in 1917. There have been many positions on tariffs. Abe Lincoln stated that he didn’t know much about trade but knew that if an American bought a coat from an English coat maker, the American had the coat and the Englishman had the money. However, if an American bought a coat from another American, the American had the coat and the other American had the money. It seems fairly intuitive at first, however, what Lincoln did not take into account was the economic concept of comparative advantage. Essentially, this is when a country can produce a good with the lowest opportunity cost. To keep it simple with an example, it means that New England States are better off growing apple and potatoes and trading with Florida for oranges and bananas. Likewise, China has cheap labor and insufficient natural resources for its 1.3 billion population, whereas the US has technology and resources, hence trade with China, and given its inexpensive cost to produce many goods, electronics clothes etc, the huge trade imbalance (see chart).
As can be seen (chart), tariffs have fluctuated with the lowest being during the Civil War and WW I. Most notable was the Smoot Hawley tariff of 1930. Of all the galactically stupid acts that Congress could pass to stave off the depression, this was somewhere in the top 3. After the stock market crash of 1929, a recession was inevitable, but as a result of the actions of Congress (the tariff) and the FED (shrinking the Money Supply by 30%), a recession was turned into a depression. The logic behind the Smoot-Hawley tariff was protectionism; in other words, if we make foreign goods more expensive by imposing tariffs, consumers will turn to US made goods. What Congress and the president failed to realize was that the US, at that time, exported more goods than it imported. In addition, retaliatory tariffs were placed on US goods. As a result world trade dropped by 35% and there was considerable damage to the American economy. Fortuitously, this was quickly reversed and legislators realized the benefits of free trade.
Since the Smoot-Hawley tariff, there have been a number of agreements world-wide to promote free trade since the 2 GATT’s (General Agreement on Tariffs and Trade). Then along comes Trump who has addressed huge trade imbalance that the US has across the world, but most specifically China. U.S. goods and services trade with China totaled an estimated $737.1 billion in 2018. Exports were $179.3 billion; imports were $557.9 billion (www.ustr.gov). The U.S. goods and services trade deficit with China was $378.6 billion in 2018. The simple fact of the matter is, that given China’s huge positive trade imbalance with the United States, they have much more to lose, and even tho there is some short term pain, it is inevitable that a solution will be reached. The biggest is China’s continuing theft of intellectual property (stay tuned for next month’s blog on China and Chinese students in the US). In the Chinese culture, men (it is a male dominated culture) that you are responsible for your own success, and this includes cheating and theft. In this case US intellectual property and cyber-security. The Huawei incident speaks for itself. In a 2017 report, the Officer of the US Trade Representative said Chinese theft of American intellectual property cost between $225 billion and $600 billion annually.
In retrospect, while there is short term pain (higher prices to consumers and lower profits for businesses), in the long run, the prospects are favorable. Even tho I voted for Trump (which was more of a vote against Hillary), I don’t defend him, but he had the intestinal fortitude to tackle trade deficits and in the long run, this will be a net positive for the US.
In retrospect, while there is short term pain (higher prices to consumers and lower profits for businesses), in the long run, the prospects are favorable. Even tho I voted for Trump (which was more of a vote against Hillary), I don’t defend him, but he had the intestinal fortitude to tackle trade deficits and in the long run, this will be a net positive for the US.
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