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Will Tariffs Make America Great Again?

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If there is one issue that Republican presidential nominee Donald Trump is outspoken about, it is U.S. trade policy.

He says,

You only have to look at our trade deficit to see that we are being taken to the cleaners by our trading partners. We need tougher negotiations, not protectionist walls around America. We need to ensure that foreign markets are as open to our products as our country is to theirs. Our long-term interests require that we cut better deals with our world trading partners.

Our country is in serious trouble. We don’t win anymore. We don’t beat China in trade. We don’t beat Japan, with their millions and millions of cars coming into this country, in trade. We can’t beat Mexico, at the border or in trade.

Although Trump claims to be a free trader, for him free trade is good only when it is fair and negotiated:

The problem with free trade is you need really talented people to negotiate for you. If you don’t have people that know business, not just a political hack that got the job because he made a contribution to a campaign, free trade is terrible.

I am all for free trade, but it’s got to be fair. When Ford moves their massive plants to Mexico, we get nothing. I want them to stay in Michigan.

For free trade to bring prosperity to America, it must also be fair trade.

Trump’s vision of free trade is for the U.S. government to “negotiate fair trade deals that create American jobs, increase American wages, and reduce America’s trade deficit.”

When it comes to trade, Trump’s solution to make America great again is generally for the U.S. government to impose or increase tariffs on certain goods from certain countries

In his book Time to Get Tough: Making America #1 Again (2011), Trump included “a 20 percent tax for importing goods” as part of his five-part tax policy. In an interview in 2015, he said in response to Ford’s announcement that it was going to build a $2.5 billion car and truck and parts manufacturing plant in Mexico, “Let me give you the bad news. Every car and every part manufactured in this plant that comes across the border, we’re going to charge you a 35% tax, and that tax is going to be paid simultaneously with the transaction.” And in one of the Republican primary debates, he proposed a 45 percent tariff on all imported goods from China “if they don’t behave.”

But it’s not just Trump. Many Americans of diverse political persuasions also believe that the imposition or raising of tariffs will make America great again in some way. This is definitely a bipartisan issue. Democratic presidential nominee Hillary Clinton is no friend of free trade either. And neither are the members of labor unions that support her.

A tariff is simply a tax on imported goods. As such it is an indirect tax, since it is not paid directly by the final consumer of the imported goods. It is also a hidden tax, since no consumer is aware of the amount of the tax that is embedded in the cost of the imported good he purchases.

Although all tariffs provide the government with revenue, a revenue tariff should be distinguished from a protective tariff. If a country levies an identical percentage tariff on all imported goods from every country solely for the purpose of raising revenue, then it is a revenue tariff. If a country levies tariffs of varying amounts on different imported goods from certain countries, then that it is a protective tariff.

Before the permanent imposition of the income tax in 1913, the primary source of revenue for the federal government was tariffs. But the United States from its very beginning has always used these tariffs to raise revenue and “protect” domestic industry. The Tariff Act of 1789, the first major piece of legislation passed by the first Congress, imposed tariffs on selected goods “for the support of government, for the discharge of the debts of the United States, and the encouragement and protection of manufactures.” The Tariff Acts of 1790 and 1792 progressively increased tariffs.

Are tariffs part of what made America great or was America great in spite of tariffs? One thing is for certain: disagreements over tariffs have always had very negative consequences. The 1828 “Tariff of Abominations” accelerated the divide between the North and the South. The 1861 “Morrill Tariff” hastened the so-called Civil War (in his first inaugural address Lincoln announced that it was his duty “to collect the duties and imposts,” by “force” or “invasion” if necessary). The 1933 “Smoot-Hawley Tariff” boosted tariffs to record levels and worsened the Great Depression.

Implied in the idea that tariffs are part of what made America great is that the United States has gone off course economically because it has eliminated protective tariffs and instituted free trade. A look at the U.S. “Harmonized Tariff Schedule” says otherwise (just reading the regulations regarding, and duties imposed on, different types of cheeses imported from the various countries is mind-boggling). The trade agreements that the United States has made with other countries, although they lower or eliminate tariffs on certain goods from certain countries, are managed trade, not free trade.

And that is the first problem with tariffs: they are part of government attempts to manage trade. Tariffs entail government central planning — something we associate with socialist governments and communist countries. How do governments — even the U.S. government with its army of economists, researchers, and analysts — know for certain which industries need “protection,” which goods should have a tariff, how much the tariff should be, and which countries that certain goods are imported from should be exempt from the tariff? If a 20 percent tariff is good because it “protects” American industries, then why not a 40 percent tariff? Why not 80 percent? Why not just ban imports altogether? Wouldn’t that be the best way to “protect” American industries? If government central planning of the economy was a disaster for the Soviet Union, China, North Korea, Venezuela, and Cuba, there is no reason to think that it won’t be bad for the United States as well.

The second problem with tariffs is that they merely increase the cost of doing business — just like minimum-wage laws, Obamacare mandates, government regulations, the corporate income tax, unemployment tax, and the employer share of Social Security and Medicare payroll taxes. Those costs result in lower dividends, reduced share prices, lower wages for workers, and higher prices for consumers.

It is not tariffs that will make America great again. And it is not managed trade agreements either. It is real free trade. It is the tearing up of the thousands of pages of the U.S. Harmonized Tariff Schedule. It is ending government intervention in the workplace, the free market, and the economy.