I have taken an interest in US President Trump’s tariffs, first on solar panels and large washing machines, and now on steel and aluminum. A tariff is defined as a tax or duty on a particular class of imports or exports. The Wall Street Journal and the New York Times are in a dither, and I’m confused about Trump’s motives and methods, too. The newspapers make the assumption that these are protective tariffs, in reaction to the large trade deficit with China. They fear retaliation by trade partners, and indeed, both Canada and Mexico have begun retaliating with tariffs of their own. Also, the European Union is preparing a list of reciprocal tariffs, supposedly aimed at industries in states that support Trump. The Trump Administration justifies the duties by claiming the 25 percent import tax on steel and the 10 percent one on aluminum promote “national security.”
While this all may be true, I wonder if this is only a partial explanation. Tariffs have a long history in the United States, starting with the Hamilton Tariff Act of 1789. The purpose was to raise federal revenue and to favor northern industries, including iron and textiles, over British imports. President George Washington made tariffs a national security issue. In his 1790 State of the Union address, he claimed protective tariffs, especially for military supplies, was crucial for US independence.
For most of its history, the United States relied on tariffs and excise taxes for the bulk of federal revenues. The 1789 tariff was the second piece of legislation passed by the fledgling US Congress. Two years later, excise taxes on whiskey, run, snuff, and refined sugar were initiated. The purpose of both types of taxes, according to the first Treasury Secretary, Alexander Hamilton, was to pay Revolutionary war debt, allow the government to function, redeem at full value federal debts, and the pay the debts of states. Since then, well over thirty acts affecting tariffs have been passed. Then, the US became a participant in the World Trade Organization when it was formed in 1994. President George W. Bush attempted a tariff on steel in 2002, but it was declared illegal by the WTO a year later.
When the income tax was instituted in 1913, under Woodrow Wilson’s administration, tariffs were reduced at the same time, but they were raised again in 1922 to help pay World War I debts. In 1930 the Smoot-Hawley Tariff raised tariffs on over 20,000 imported goods and is sometimes blamed for exacerbating, if not causing, the Great Depression. Far from our supposed “free trade” stance, the US now collects duties on over 12,000 items.
However, as of 2017, tariffs comprised only a small portion of federal revenues. Individual income taxes (41%), payroll taxes (40%), and corporate income taxes (9%) made up the bulk of federal income, with excise taxes adding another three percent, according to government data. But, with the combined effects of federal, individual, and corporate income tax cuts in 2017, as well as the increase in federal spending, I have to wonder it the Trump tariffs of 2018 are partly designed to raise needed federal revenues.
The president claims he wants to stimulate the domestic economy, but manufacturers whose supply chains depend on imported steel and aluminum products say, if the New York Times is to be believed, that increased prices will force them to cut back on employment, expansion, and production. Uncertainty abounds, for good reason. The initial proclamation included Canada, Mexico, and the European Union, but then a month’s moratorium was granted. The moratorium ended on May 31. Australia, Argentina, Brazil, and South Korea have been granted exemptions. Canada has declared reciprocal tariffs to begin on July 1, and Mexico has instituted tariffs, too. The EU is drawing up its own list. The backlog of specific exemption requests is expected to take months to process.
Since so many others are speculating about how this will play out, I figure I can speculate, too, but I take a different tack from the hand-wringers in New York. I hope it will reduce consumerism. All taxes are ultimately paid by the individual, and tariffs are taxes on consumption rather than income. The only beneficiaries of tariffs are governments and protectionist industrialists like US Commerce Secretary Wilbur Ross.
Now, this is an interesting little side story in the Trump tariff saga. Secretary Ross made a hefty little profit on the Bush tariff of 2002, if the Wall Street Journal of March 10-11, 2018 is to be believed. He took full advantage of that tariff to scarf up struggling steel enterprises, including Bethlehem Steel, restructure them to unload debt and pension obligations, and sell in 2004 to London-based Mittal, where he became a board member until joining Trump’s team and selling his Mittal shares. Now, the new tariffs apparently include EU imports and companies like Mittal? Hmmmmm.
This evolving tariff drama also leads me to speculate about whether it will stimulate metals recycling operations in the US and elsewhere. If the price goes up for steel and aluminum-based products, will it reduce demand, strengthen the dollar, or lead to higher quality?
Is the president throwing angered trading partners China’s way, in direct opposition to his stated intentions? Where will the EU go for its steel and aluminum if US prices suddenly exceed those of subsidized producers like those in China? The US has less than half the iron ore reserves of Russia and China, says the WSJ, because we have been going through ours so fast.
I commiserate with those directly affected by the president’s erratic course, and suspect it will hurt “the economy” in the short term, if only to make China more competitive than ever. In the longer term, I believe it may be good for the US to slow down, withdraw somewhat from the world stage, and to allow others the space to grow and prosper.