Tariffs mean damage
Previous trade wars have done economy harm
The famously peevish ex-Chicago Cubs manager Leo Durocher was careful to keep an extra set of front teeth in his pocket in case someone took particular umbrage at his taunts. If the United States follows through on threats to impose tariffs on various Chinese, German, Canadian and Mexican imports, American consumers and businesses might also need backup as those nations retaliate with protectionist haymakers of their own.
Those skirmishes, however, might be only Round One of a protracted fight from which no one would emerge unscathed. Assuming U.S.-imposed tariffs are ruled illegal by the World Trade Organization, it is not beyond the realm of possibility that a peeved Trump administration would withdraw the U.S. from the WTO, effectively disabling an invaluable rules-based institution.
There appears to be a rhythm to outbreaks of economic nationalism. On three previous occasions since the late 19th century — and at roughly 40-year intervals — the U.S. fought trade wars with major economic consequences.
The timing of the latest round seems especially peculiar.
At 2.6% of GDP, the U.S. current-account deficit (the broadest measure of trade) has shrunk by more than half since 2005 and is about the same as Mexico and Canada. China’s 1.6% surplus is six times less than that of the Netherlands and 12 times less than that of Singapore.
On the surface, policies implemented by the Reagan administration in 1982 to protect the American auto industry could be viewed as having accomplished their objective. But those trade restraints only masked deep-seated structural and managerial problems.
The U.S. auto industry was slow to shift to smaller cars following the steep energy price increases of the late 1970s. An overvalued U.S. dollar — a consequence of sky-high interest rates — made American vehicles even more uncompetitive overseas and foreign imports an attractive option at home.
Neither factor had much to do with unfair trade policies in Japan or elsewhere.
A 1986 report from the Congressional Budget Office concluded that the Reagan-era trade restraints on auto imports (and steel and shoes) “may not have enabled firms to overcome the sources of their competitive disadvantage.”
It was during the early months of the Great Depression, however, that protectionists took their hardest swings at free trade. By nearly all accounts, the Smoot-Hawley Tariff Act of 1930 greatly magnified the global depression already underway. Between 1929 and 1932, U.S. exports to Europe fell by 67%.
A June 1930 edition of The Economist complained that the legislation was a “tragic-comic finale to one of the most amazing chapters in world tariff history ... one that Protectionist enthusiasts the world over would do well to study.”
In doing so, foundational questions might be asked, including:
If a country’s competitive advantage is based solely on the willingness of its labor force to accept lower wages, is that unfair trade?
If a country’s competitive advantage is based solely on lower regulatory standards that reduce production costs, is that unfair trade?
If a country’s competitive advantage is due solely to government subsidies or currency manipulation, is that unfair trade?
There are no simple answers. Intricate global supply chains further complicate the situation.
So-called intermediate goods — things that become part of other things — now account for about half of all U.S. imports and are, in turn, often assembled and sold overseas. And while tariffs on steel might help domestic producers, 44 times more Americans work in industries that use steel than make steel.
The upward pressure on inflation from rising import prices might even spur the Federal Reserve to raise interest rates more than necessary, potentially killing off the economic expansion.
Populist movements that spawn protectionism are a potent mix of shared resentments and cultural insecurities, spiked by economic frustration. Confronted in 1893 with a financial collapse caused by railroad bankruptcies, the firebrand populist William Jennings Bryan stirred the working class to revolt against alleged elites. In July 1897, the Dingley Tariff Act raised import levies by about 50%. As the historian H.W. Brands observed, the U.S. in the 1890s was “somewhere between the past and future.”
That seems an apt description of now. And since the past cannot be reclaimed nor the future hurried, a new but familiar battle looms. The damage would be more than cosmetic.