Mises Wire

The New Tariff of Abominations?

The Tariff Act of 1828 quickly became known as the “Tariff of Abominations.” That tariff now has a contender for the name.

The Trump tariff program seems to be metastasizing by the day. What are Mr. Trump’s objectives? Consider a different question first. Would Trump be on this course if he thought that it would cost campaign contributions or votes in November? Silly question. As I see it, Trump tariff policy is the most brazen reach for votes and political cash since the Smoot-Hawley Tariff of 1930, and may go down in history as just as big a mistake.

Smoot-Hawley accelerated the sickening descent into the Great Depression. Depression is improbable now but the Trump tariffs combined with the predicable retaliation by other countries is yielding a train wreck. The United States has ratified trade treaties; the only enforcement mechanism built into those treaties is foreign retaliation. The treaties are far from perfect but they have helped the world move toward a more liberal, orderly international trading system under rule of law.

Only Congress can stop this madness. Very simple legislation with two clauses will do what is necessary. 1) The tariff schedule of the United States shall be the one in effect on January 1, 2018. 2) This Act shall take effect immediately upon the President’s signing or upon the congressional override of a Presidential veto.

Republicans should remember Smoot-Hawley and that Herbert Hoover is not one of the more renowned Presidents of U.S. history. Democrats should refrain from all comment; their votes for the bill will be comment enough.

Why do I conclude that the Trump tariffs are a reach for political cash of breathtaking scope? Open several windows on your computer screen and wander back and forth between the new tariff lists released in March and June and the opensecrets.org web site. What you will see is that the import restrictions are highly correlated with firms and industries making political contributions to Republicans.

Here are several examples arising from tariffs on steel and aluminum: The United States Trade Representative simply had to put bulldozers on the higher tariff list, because there is a lot of steel in a bulldozer and heavy equipment manufacturers are major donors to Republicans. At the top of page 10 of the June 15 list, you will find “Floating docks.” Is floating dock manufacture essential to U.S. world leadership? Actually, there must be a tariff on floating docks because the aluminum tariff will make dock manufacture in the U.S. uneconomic. Given that fiberglass docks are close substitutes for aluminum docks, they will need a tariff, too.

The first two words in the June 15 list are “Lubricating oils.” Now go to the opensecrets.org web site and find the chemical industry. There are big campaign bucks there, mostly for Republicans.

Has USTR anticipated all the secondary effects up and down the supply chain? No. Just as Nixon price controls were hammered by the unanticipated OPEC oil embargo following the October 1973 Middle-East war, so also will Trump tariffs be hammered by unanticipated economic interactions and events. Thus, the initial tariffs will tend to spread, like the kudzu vine.

Ironically, in the 19th Century tariffs were the driving force behind populism. Congress designed high tariffs to favor Eastern manufacturing firms. The tariffs hurt agrarian interests in the Midwest and West. That is where populism U.S. style came from. Woodrow Wilson ran against the tariff in 1912 and one of his first acts was the Revenue Act of 1913. The tariff part of the legislation is known as the Underwood Tariff, which reduced the basic tariff from 40% to 25%.

Prior to passage of the 16th Amendment to the Constitution, which authorized an income tax, the tariff was the principal source of revenue to the federal government. Passage of the Amendment, effective February 1913, changed the revenue picture permanently. After that, the tariff became an almost purely political issue of conferring benefits and burdens on various parts of society. Until the Great Depression, the tariff was the business of Congress; the President could not make the decisions by himself.

Starting with the Reciprocal Trade Act of 1934, Congress granted the President authority to negotiate trade agreements. After World War II, Presidents negotiated trade agreements subject to congressional approval of a comprehensive package, such as NAFTA. Trade law grew increasingly complex; the basic principle became one of wide Presidential discretion subject to political constraints that have varied from time to time. Ironically, Trump’s first set of tariff increases this past March occurred under authority of Section 232 of the Trade Expansion Act of 1962. Trade Expansion? As this President might say, “very sad.” There is zero probability that a future war will cut off U.S. access to steel and aluminum produced in other countries. The national defense rationale for these tariffs is transparent nonsense.

Political use of the tariff is, sadly, consistent with all U.S. history going back to the earliest days under the Constitution. In fact, the second act passed by the new Congress under the new Constitution was the Tariff Act of 1789. At that time, the tariff was the only practical way the government could raise revenue. That said, take a look at the very uneven provisions of that act. The United States got off to a bad start in raising revenue in a way that was not at all consistent with the rule of law. Ignoring the rule of law, we pitted citizen against citizen and continue to do so.

Trump is probably chuckling every time he hears of economists and foreign policy experts predicting disaster from his new tariffs. His intention, I will guess, is to negotiate the tariffs down or eliminate them as soon as they become politically inconvenient. Meanwhile, he will have accumulated a massive amount of campaign cash. It is a dangerous game. These tariffs will damage the credibility of the United States at home and abroad for many years.

The late William Niskanen liked to say that Congress should give powers to the President under the assumption that the person most feared to hold that office would occupy it. There may not be many congressmen who voted for the Trade Expansion Act of 1962 still alive; if there are, perhaps they will reflect on the Niskanen principle.

Forget about the always plentiful cover stories: “national security,” “technology transfer,” “currency manipulation,” “unfair competition due to cheap labor,” … . The list is endless. Do not be taken in. Face the truth of what is really going on.

The power of the President to change tariffs in Trump fashion ought not to exist. This kind of arbitrary action is not remotely consistent with the rule of law. We must not confuse a statute with the rule of law. If congressional Republicans do not stop Trump, in time the tables will be turned and they will regret it. They will also deserve it.

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