Ralph Reiland: Prosperity isn't produced by tariffs
Regarding the supposed benefits and associated costs of tariffs and subsequent retaliations and trade wars, President Trump offered a simple analysis and trouble-free bottom line in a tweeted one-liner: “Trade wars are good, and easy to win.”
History and basic economic analysis show that it’s not quite that simple and predictable.
Tariffs, i.e., a tax on imported goods, increase government revenues and benefit domestic industries by reducing competition from low-cost foreign producers by artificially inflating the price of imports, but tariffs also produce anti-consumer effects via higher prices and costs domestically for both individual American consumers and U.S. businesses.
If the prices of steel and aluminum are increased in the domestic market due to tariffs, consumers may well pay more for Buicks, washers and dryers.
Since rising prices generally produce a decline in unit sales (as illustrated in Economics 101 by the demand curve), wage inertia and employee layoffs are likely to be the consequences of declining sales volumes in companies producing automobiles, appliances and a wide range of other goods utilizing steel and aluminum.
“Coca-Cola Will Raise Soda Prices Due to Trump Tariffs,” for example, was a BBC News headline July 26 on a report by Mairead McArdle, news writer for National Review Online.
“The White House’s tariffs on $50 billion worth of Chinese goods have caused higher freight rates and metal prices, president and chief executive of the company James Quincey said in a CNBC interview,” reported McArdle.
“The tariffs on the metals, it’s one of many factors (that) caused us to go out in the middle of the year and announce price increases,” said Quincey. “Less trade and more tariffs will mean less economic growth in the end and that will affect (Coca-Cola).”
Following the 25 percent tariff that Trump announced on more than 800 Chinese products, China stated that the American president had started “the biggest trade war in history” and immediately retaliated with a series of tariffs of its own.
Projecting the impact of tariffs and trade wars on a wider and more macroeconomics level, CNNMoney economics reporter Patrick Gillespie in an interview with CNN editor-at-large Chris Cillizza explained that “America’s last trade war exacerbated the Great Depression in the 1930s, when unemployment rose to 25 percent.”
Gillespie outlined how the tariff policy mistake was made that turned an American recession into the Great Depression: “Claiming it was protecting American jobs, Congress passed the Smoot-Hawley Act in 1930. The original bill was meant to protect farmers. But to build political support, many lawmakers asked for tariffs — or taxes — on all sorts of goods in exchange for their vote. Several nations, such as Canada, slapped steep tariffs — or taxes — on U.S. goods shipped and sold abroad. For example, U.S. exports of eggs to Canada fell to 7,900 in 1932 from 919,000 in 1929, according to Doug Irwin, a Dartmouth professor in international economics and former trade adviser to President Reagan.”
Concluding, Gillespie pointed to the results, the bottom-line negative impact on the U.S. economy of the 1930 tariff legislation and its attempt at enact protectionism by way of taxation on imports. “U.S. imports fell 40 percent in the two years after Smoot-Hawley. Banks shuttered. Unemployment shot up.”
Ralph R. Reiland is associate professor of economics emeritus at Robert Morris University and a local restaurateur. His email is firstname.lastname@example.org .