On March 1, the U.S. and global business communities, their financial markets, the U.S. Congress and many in the Trump Cabinet and White House were surprised to learn that the President was considering the imposition of tariffs on imported steel and aluminum. Initial response to the tariffs by many in Congress and even within the Cabinet has been negative.
In modern times the U.S. has operated within the umbrella of open-trade/low-tariff policies. However, the U.S. has a long history of tariffs going back to when it was a fledgling nation. The first tariff law passed by Congress, the Tariff of 1789, was enacted on virtually all foreign goods coming into the U.S. The idea was to protect emerging domestic industries and to raise money to run the government and (already) service its debt. The fact is that until the federal income tax was initiated in 1913, revenues from protectionist trade policies were keystones of American foreign policy and one of the greatest sources of government revenue. During the World War I years, tariffs generated about 30% of federal income, but tariff income became a declining percentage of revenues since 1935.
After World War II, the U.S. signed the General Agreement on Tariffs and Trade (GATT), which agreed to minimize tariffs and encourage free trade among capitalist nations. By 1995, GATT evolved into the World Trade Organization as communism failed and open markets and low tariffs prevailed in world trade policies. For example, instead of high tariffs in response to high imports of motor vehicles into the U.S. from Japan in the 1970s, organized labor and trade negotiators hammered out a voluntary import quota from Toyota and Nissan. This had the same effect as a tariff but without the ill feeling and the vindictive context of a retaliatory response.
Based on the reports I have heard and read, the tariffs are getting their primary support from the steel and aluminum companies being protected and the labor unions whose workers serve these industries. Just about everyone else – including most American consumers, a big chunk of Congress, some of the President’s cabinet, many credible economists and certainly the financial markets – think the tariffs are, at the very least, ill-thought and ill-timed. To these naysayers I must add my voice. There are better, less belligerent and more politically palatable ways of achieving the same results, starting with the import-quota approach used successfully in the 1970s.
As originally announced, the President’s tariffs were to be broad-based and inclusive of all steel and aluminum importers to the U.S. The problem with this is that it hurts countries like Canada and Mexico, who are allies, more than it hurts China or Russia.
On March 8, the President signed an order that imposes the tariffs (25% on steel and 10% on aluminum). After some wrangling with his staff, however, Trump allowed a temporary exception for allies Canada and Mexico while the North American Free Trade Agreement (NAFTA) gets renegotiated.
As of this writing the tariffs were to go into effect on March 23. Undoubtedly, some readers of this column directly involved with domestic steel and aluminum production may applaud the tariffs. However, commercial forging operators who use raw steel or aluminum as material inputs will see their cost of goods sold increase, which will, in turn, cause their prices to go up.
In effect, American businesses and consumers are about to sustain a tariff-induced tax on durable goods ranging from big-farm and mining equipment down to the family car and the household refrigerator. I can’t imagine this to be a good thing, but I look forward to revisiting this topic in the near future.