Relevant History – Tariffs Have Worked Before, Could They Work Again?

Its time to take another look at tariffs. There, I said it, and I feel better for it. Tariffs were historically an enormous part of American fiscal policy. In 1792, tariffs on imported goods accounted for 95% of the Federal Government’s annual budged. Of course, the budget was only $4.4 million. Times have certainly changed. As of 2010 the United States, as a member of the WTO, has an average tariff of only 1.3%, which brings in a palsy 1.2% of the annual budget: about $25 billion. What could a tariff do for the United States?

As I write, Wall Street protests continue to grow as the ranks of unemployed continue to swell. In August, there was a net gain of zero jobs. Zilch. The middle class continues to be squeezed as wages in this country have remained stagnant for thirty years. Republicans in Congress demand that any measures taken by the government not raise taxes on Americans. Democrats, on the other hand, press for measures that are unlikely to pass despite relatively massive support ( impasse threatens the stability so cherished by all Americans. A reexamination of tariff policy could right all these wrongs. Tariff collection, even on almost surely diminished imports, would be a big boost to the government’s bottom line without putting a direct tax on any American.

Tariffs are designed to protect industry in a given country. They were the cornerstone of a policy that allowed American industry to form in the first place. Tariffs on cotton textile imports in the nineteenth-century was what allowed otherwise non-competitive American industry to compete for sales in the American market. Without protection, these nascent attempts at production would have been killed by British imports. Its that simple. Who would buy American when it cost more? That’s just capitalism. As American industry became well capitalized, robust, mature, and eventually dominant, the practice of “free trade” became the dominant philosophy. Freer trade would allow dominant American industry to, well, dominate the markets of China, the Philippines, and Latin America. Bully for the United States (Britain, Germany, France, and Belgium), but no so much for China.

Move forward to the twentieth century and we see the inevitable problem. China closed its markets behind a protective communist bubble in 1949. The war had left the United States with a nearly absolute dominance in manufacturing, which suggested that the right course was to negotiate increasingly freer trade. Lower tariffs would allow American goods into the markets of Europe, Latin America, and the rest of the first and third worlds. But here’s the rub. Thomas Friedman has written about how the world was flattened in the pursuit of this free trade. It was. American workers would have to compete with any other workers. When Americans had to compete from the dominant position, well, hey, free trade sounded pretty good. But now? What happened when you negotiated treaties that made something produced in the Philippines or Mexico exactly the same as something made in the United States and transportation costs were pretty negligible? It became economically desirable to move factories to the Philippines, Mexico, or later China. So long jobs. America had again become the open market no longer able to compete with global competitors. Its inevitable, and its cyclical. But its also reversible through the application of tariffs to make local business competitive with global firms.

Some will have problems with this solution. In theory, free trade agreements contain protections that say “if you made it with less than American standards, we aren’t going to buy it,” but these provisions are rarely enforced. That leads to Americans in a race to the bottom that they can’t win, and shouldn’t be forced to. The compunction should be in a race to American standards, not Communist Chinese standards. Some will say that the world is too different, and tariffs no longer can work. In 1792 you had a couple of “global” companies in the British and Dutch East India Companies, but I think its fair to say the scale is a bit different. In short, it was advantageous for the political elite to advocate protectionism in the eighteenth- and nineteenth-centuries. Now? Not so much. So long as we live in an environment where as long as Coca-Cola does fine financially, everything is lovely the nation is in trouble. If American business, actually done in America, can’t compete because the world doesn’t play by fair rules, the government was and is obligated to level the playing field for Americans.

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