Tariffs – February 15th, 2015

This is my favorite part of why I started the blog. Maybe I got a little rough with Jason the other day after he tried to give Keynes credit for I don’t know what, but I would much rather fill in gaps and give references than rip on Jason. He’s doing a hell of a job, and his heart is definitely in the right place. I’m glad he is doing what he is doing.

He did great explaining the Smoot-Hawley Tariff, and that whole spiel. However, in my opinion, Tariffs can’t be discussed without mentioning John C. Calhoun. There is no shortage of things that could be said about the man. He was a representative, then The Secretary of War, and then The Vice President under John Quincy Adams and Andrew Jackson. Then he became a Senator, then secretary of State under Tyler and Polk, and then a Senator again until his death.

He started off his career as a nationalist, advocating a strong central government and high tariffs, but after the Tariff of Abominations in 1828 he changed his view and championed states’ rights, nullification, and low tariffs.

As a disclaimer, I should probably get this out of the way right here: Calhoun was from South Carolina and was not merely a proponent of slavery but one of its greatest defenders throughout his career. This is regrettable, but if we are unable to learn from a man on one subject, though we may find him lacking in other areas, we stand to deprive ourselves of great insights.

He got slavery wrong, but he got the tariff question right (at least after the Tariff of Abominations). And, he was the first to recognize that a tax on imports ultimately becomes a tax on exports.

Let me also make one caveat before I get started in this: There are two types of tariffs, revenue-generating tariffs, and protectionist tariffs. The first is the class that are low, around 5-10%. The whole concept here is volume. The tariff isn’t meant to impede trade, but merely to skim a little off the top. Well, over 100 years before Arthur Laffer developed the Laffer Curve, Calhoun realized that a tariff of 38% wasn’t intended to generate revenue, but was instead generated to prevent trade.

When tariffs are at 10% trade continues more or less unimpeded, the Home manufacturer gets a slight advantage over and above the advantage he has of location, considering a European manufacturer has to contend with higher shipping cost. However, at the end of the day, we’re talking about home field advantage at a baseball game, not loaded dice.

When tariffs are at 38%, that shuts out foreign markets making them prohibitive. Domestic industry is left with no outside competition and is therefore able to charge much higher prices than they would be able to otherwise.

Now in this case it was steel, which as it turns out was very important to farmers to use in everything from axes to plows. This drove up the costs involved in the production of cotton and this is where the tax on exports comes in. With Cotton Farmers having to pay 30-40% more for farm implements than cotton farmers in India and Egypt, they are beaten out of European markets and have a much harder time finding buyers in foreign markets. This is exactly the raw deal that caused the Southerners to seek independence when Lincoln won the presidency. Not slavery; as Lincoln said, he “had no desire nor authority to interfere with slavery where it existed” but he did favor “protection for home industry.” It’s worth reading Lincoln’s first inaugural address to see his total ambivalence towards the slave question and his willingness to shed blood if South Carolina refused to submit to the tariffs. As a further aside, the Southern constitution capped tariffs at 10%, while Lincoln endorsed the Corwin Amendment (also referred to in his first inaugural) which would make slavery a permanently protected institution and whose amendment would be irrevocable.

But let’s get back to tariffs. We can see the same sort of thing today. There is a high tariff on steel, and that puts U.S. automakers at a disadvantage. Thus, we are less competitive on the global market and U.S. auto exports are weakened.

A more striking example is the tariff on sugar. Coca Cola uses high fructose corn syrup for domestic production simply because sugar is too expensive in the U.S. due to the protective tariff. However, if you can find Coke bottled in Mexico, you’ll see that its sweetening ingredient is real sugar. It’s cheaper to have a bottling plant in Mexico that uses real sugar, and then import the coke to the U.S. than to import the sugar and bottle in the U.S.

Thus, if you are in the particular industry that is being favored by the tariff, and if the tariff only applies to the one item you make (say steel for instance) you might consider supporting it. If the tariff passes, you’ll Do well, but the trouble comes when other people seek and succeed in getting protective tariffs.

You win when you do steel and there is a protective tariff on steel, but what happens when there is also a tariff on beef, and sugar, and wine, and shoes and televisions and cars and tires and so on. Now you are no better off, and indeed we are all worse off.

 

1 thought on “Tariffs – February 15th, 2015”

  1. One point on protectionism often neglected, I think Mises makes it: protected industries face domestic competition, and the increased margin of profits (if any) shall be eaten up by further investment that bids up the costs of factors of production. Thus even the beneficiaries gain only higher domestic price floors and have no necessary long term advantage.

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