Not Again
No getting around tariffs. A broad variety of these charges on goods from other countries were announced on April 2nd. Not surprising this radical departure from a global economy based on free trade sent the markets into a tailspin.
George Washington’s Second Bill
So what is the thinking behind tariffs. When George Washington was elected President the second bill he signed was to invoke tariffs on goods from England. In the Constitution Congress had the power to levy tariffs. The tariffs were deemed necessary to protect the fledgling economy of the new independent country. Since then and until the end of World War II the United States has invoked tariffs of various kinds at various amounts.
They served to protect industrial development and agricultural viability. In the economy of the 19th and early 20th century these kinds of protections made sense. They allowed the United States to develop its industrial prowess and preserve rural agricultural economies. The other reason for tariffs is that they were the primary source of revenue for the government. This changed in 1913 when the 16th amendment was passed that gave Congress the power to tax incomes.
Smoot Hawley Act of 1930
In 1930 in the aftermath of the stock market crash Herbert Hoover signed into law tariffs referred to as the Smith Hawley act. It was supposed to protect struggling U.S industries. Instead, it prompted other countries to establish tariffs. This resulted in less trade. It did not cause the depression it contributed to its depth and length.
When countries cannot acquire the goods they need to sustain their economies through trade they revert to other means. Japan invaded China and Germany invaded Poland and then Russia. Both conquests were prompted by a dominant military power’s need to acquire goods for their countries economic growth that could not be obtained through trade.
So What Changed?
Slowly in the aftermath of World War II the general belief was that America was now a dominant economic power. We no longer needed protection. The trade that we sponsored both with imports and exports sustained the economies of other countries. Free Trade contributed to political stability and regional security. Ronald Reagan spoke eloquently about the benefits of free trade to the success of free nations to govern and prosper.
Liberation Day?
April 2, Liberation Day a broad variety of tariffs were announced. It is now generally believed that these tariffs will result in higher prices and will slow economic growth. The stock market which is nothing more than the monetized expectation of future profits made it clear. They view tariffs as a detriment to strong economy. The Dow Jones has plummeted since the announcement. The argument for tariffs is that it shifts the tax burden from America to the Countries that import goods into America.
The problem with that argument is that the companies that import goods will simply add the cost of that tariff, that tax to the consumer. It is by its nature a regressive tax. Median Income individuals spend a higher percentage of their income on consumable products. High Net Worth spend less of their income on consumables and have greater flexibility in their buying power to avoid tariffs. So the Middle Class will ultimately pay the tax as the tariff is transferred to the goods they buy. It won’t look like a tax but it will sure feel like one. Not very sensible in my view.