In recent years, the placement of tariffs on imported goods from other countries has become a much-talked-about topic. There is no doubt that a great deal of this discussion has been generated by President Trump’s reliance on tariffs as a means of conducting foreign policy.[1] To an extent, the recent resurgence of the tariff, as a tool of American foreign relations, represents a departure from a firm commitment to free trade that has been a mainstay of American diplomacy since the end of World War II.[2]
To understand the value of tariffs in the modern context, it is useful to explore consider: (1) the historical role of tariffs in the U.S., (2) the reasons why the tariff was largely abandoned in the mid-20th Century, and (3) the reasons why some people believe it would be a good idea to implement tariffs today.
This analysis reveals that tariffs in the modern era no longer further the same interests as those served earlier in our history, which were to raise revenue for the federal government and to protect American industry.[3] The federal government no longer needs or relies on revenue from tariffs for funding.[4] While tariffs can be valuable in protecting American industry today, I argue that more focused measures should be taken before resorting to tariffs because they inevitably bring collateral damage to our own economy.
Tariffs in the Early United States
Among the first acts signed into law by the first Congress was The Tariff Act of 1789.[5] The Act had two purposes: (1) to promote trade, and (2) to raise revenue for the federal government.[6] Notably, Alexander Hamilton was a strong proponent of the legislation.[7] Hamilton viewed the Act as playing key roles in protecting the burgeoning American manufacturing sector from foreign competition and in promoting industrial growth over the long term.[8] This law was not without controversy,[9] but it eventually grew to be an important source of revenue for the federal government. It is estimated that in some years during the 19th Century, the tariff provided as much as 95% of the revenue for the federal government.[10]
The Demise of the Tariff
In the early 1900’s, the adoption of the income tax [11] and the tremendous industrial expansion of the late 1800’s [12] undermined the historical justifications for the tariff in two ways: (1) the U.S. no longer needed the tariff to fund the federal government, and (2) the U.S. no longer needed to protect its industry from foreign competition.[13]
In the wake of the Stock Market Crash of 1929, President Hoover signed the Smoot-Hawley Tariff Act (“Smoot-Hawley Act”) into law.[14] The Smoot-Hawley Act sought to raise import duties by an average of 20%.[15] Its goal was to protect American farmers from the economic downturn brought on by the crash.[16] European countries promptly retaliated with tariffs of their own.[17] Overall, the tariffs caused trade between Europe and the U.S. to decline by two-thirds.[18] Although the exact economic impact of the tariff is difficult to quantify and is subject to debate, some observers argued that the tariffs contributed to European bank failures and exacerbated the economic turmoil of the 1930s, thereby giving rise to extremist ideologies throughout Europe .[19]
The Era of Free Trade
At the end of World War II, tariffs were decreased substantially, and the U.S. went on to lead the formation of the General Agreement on Tariffs and Trade.[20] This was the precursor to the World Trade Organization, which has sought to promote the reduction of tariff barriers to world trade.[21] The U.S. has continued to favor “free trade” and has generally disfavored tariffs in the years since.[22] Free trade is defined as “a policy to eliminate discrimination against imports and exports.”[23] Many economists argue that free trade is a net positive because it allows countries to focus on economic activities in which they have a comparative advantage.[24] Proponents of free trade argue that by allowing nations to specialize and rely on one another for other products, there is a net positive benefit to the nations.[25] In 2018, even with recent increases in tariffs, they represented only a small fraction of receipts by the Treasury.[26]
The Tariff Today
Tariffs, and the threat of tariffs, have become central to U.S. trade policy in recent years. For example, President Trump has (1) proposed a 25% tariff on cars from Europe,[27] (2) retracted a proposal to tax aluminum from Europe,[28] (3) proposed a 20% tariff on all goods from China,[29] and (4) imposed steel and aluminum tariffs on Mexico and Canada (which is still in place despite progress on a new North American trade deal).[30] These various actions and proposals have prompted other countries to consider, and in some instances implement, retaliatory tariffs.[31] Market participants in the U.S., particularly farmers, are becoming increasingly concerned about the economic consequences of the escalating tensions between the U.S. and its trading partners.[32]
A myriad of justifications have been offered for the increased reliance on tariffs. They include, but are not limited to: (1) to bring back jobs lost to foreign countries,[33] (2) to place tariffs on nations that themselves have tariffs on imports from the U.S.,[34] (3) to curb intellectual property (“IP”) theft by China,[35] and (4) to balance the trade deficit.[36] Taken together, it is clear that the aims of these tariffs are more directed towards protecting American industry than raising revenue for the government. There can be no doubt that the offshoring of jobs and IP theft by countries like as China poses a tangible threat to American workers. But we ought to ask ourselves whether tariffs are the right tool to address these problems.
I argue that while these problems need addressing, the tariff is not well-suited for this task. Given the grave risks posed by a trade war, such as those that occured following the passage of the Smoot-Hawley Act, reliance on tariffs to solve these problems could ultimately cause more harm than good. As previously discussed, other countries have already passed, or are considering passing, retaliatory tariffs of their own.[37] In fact, there is already mounting evidence that tariffs are causing more jobs to be lost than gained.[38] There is further evidence that through increased prices, the increase in tariffs is passed on to the American consumer and not to our economic adversaries like China. [39] Considering that some of these tariffs have been placed on our allies within NATO,[40] tariffs have the potential to not only upset our own economy, but also damage our national security interests as well.
There are important issues with respect to trade that must be addressed. We should consider, however, whether the tariff is an appropriate solution to the trade problem given the risk of collateral damage to our own economy. It is important to recognize that as a concept, free trade is difficult to pursue when economic adversaries such as China refuse to take down their barriers.[41] Some have argued that the U.S. may have to abandon free trade entirely in its dealings with China because our economic systems are incompatible.[42] That may or may not be true. In any event, I believe that tariffs are not the best means for the U.S. to address economic incompatibility with China.
Take China’s theft of IP for example. It is estimated that misappropriation of IP by Chinese firms costs the U.S. economy between $225-600 billion annually.[43] That poses a material threat to the long-term viability of our economy and this threat must be addressed.[44] The government has approached this problem from a number of different angles, one of which has involved the use of tariffs.[45] I argue that we should take a laser-focused approach to this problem that does not cause direct collateral damage to the American economy. For example, the Justice Department has recently charged Huawei, a Chinese telecom company, and one of its executives with IP theft, while also noting that the use of their technology poses a national security threat to the U.S.[46] Governments around the world, such as the United Kingdom, have also abandoned Huawei technology over national security concerns.[47] Some observers have drawn comparison between these charges and the charges against China’s other telecom giant, ZTE, which nearly bankrupted the company.[48] This enforcement action will surely provide a powerful incentive for the company to comply with American IP laws or force it to face serious consequences otherwise. Since this post was written, the Chinese government still has taken no action in response to this issue, despite the dire implications for the Chinese telecom industry.[49] However, China has argued that it is receiving unfair treatment.[50] This is just one example of how the U.S. can address these problems more effectively through non-tariff means that have less collateral damage to its own economy. Further, this example speaks to the capacity of Article III courts to promote fair dealing in the U.S.’ interactions with economic adversaries, whose economic systems are not necessarily compatible with notions of free trade.
The U.S. should always seek to ensure that it is being treated fairly by its trading partners and employ tools that are well-tailored to that end. There are some circumstances in which tariffs on particular countries could be justified. An example is when another nation refuses to remove its own restrictions on goods from the U.S. In that circumstance, the tariff could serve as a narrowly tailored tool when administered solely on a particular country as a means to leverage them into opening their markets to American goods. Even in that situation, however, the U.S. should consider if there are other means to achieve the same ends without employing tariffs that harm American businesses and consumers.
The U.S. has dramatically transformed since the days in which the tariff was instrumental in protecting American industry and providing revenue for the federal government. New sources of revenue and the comparative strength of American manufacturing have mooted the historical justifications for the protective tariff. To the extent that tariffs are a valuable tool of trade policy in the modern global economy, they should only be utilized as a last resort after reliance on methods less damaging to the U.S. economy have proven futile. In doing so, the U.S. can remain committed to free trade without allowing centrally managed economies to take advantage of them.
[1] John W. Schoen, Trump Claims ‘Billions Of Dollars Are Pouring into the Coffers of the USA’ Because of His Tariffs, but That’s Just A Drop in the Bucket, CNBC (Nov. 29, 2018), https://www.cnbc.com/2018/11/29/trump-claims-money-pours-in-because-of-tariffs-but-they-are-not-much.html.
[2] Adam Barone, Free Trade, Investopedia (Mar. 4, 2019), https://www.investopedia.com/terms/f/free-trade.asp.
[3] See, e.g., Brian Domitrovic, When Tariffs Worked, Forbes (Mar. 9, 2018), https://www.forbes.com/sites/briandomitrovic/2018/03/09/when-tariffs-worked/#39a8d7af70f9.
[4] See, e.g., id.
[5] Michael P. Malloy, Tariff Act of 1789, Encyclopedia.com (Feb. 26, 2019), https://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/tariff-act-1789.
[6] Id.
[7] Id.
[8] Id.
[9] Id. (discussing South Carolina’s nullification crisis).
[10] Jeffry Bartash, Trump Is Right: America as “Built on Tariffs,” MarketWatch (Aug. 16, 2018), https://www.marketwatch.com/story/trump-is-right-america-was-built-on-tariffs-2018-08-15.
[11] Brian Domitrovic, When Tariffs Worked, Forbes (Mar. 9, 2018), https://www.forbes.com/sites/briandomitrovic/2018/03/09/when-tariffs-worked/#39a8d7af70f9.
[12] John P. Rafferty, Industrial Revolution, Encyclopedia Britannica, https://www.britannica.com/event/Industrial-Revolution (last visited Mar. 7, 2019).
[13] See, e.g., Brian Domitrovic, When Tariffs Worked, Forbes (Mar. 9, 2018), https://www.forbes.com/sites/briandomitrovic/2018/03/09/when-tariffs-worked/#39a8d7af70f9.
[14] Adam Augustyn, Smoot-Hawley Tariff Act, Encyclopedia Britannica, https://www.britannica.com/topic/Smoot-Hawley-Tariff-Act (last visited Mar. 7, 2019).
[15] Id.
[16] Id.
[17] Id.
[18] Id.
[19] Id.
[20] Adam Barone, Free Trade, Investopedia (Mar. 4, 2019), https://www.investopedia.com/terms/f/free-trade.asp.
[21] Id.
[22] Id.
[23] Id.
[24] Id.
[25] Id.
[26] Schoen, supra note 1.
[27] Holly Ellyatt, German Car Giants Warn Trump’s Tariff Threat is A ‘Critical Situation’ for Them, CNBC (Mar. 5, 2019), https://www.cnbc.com/2019/03/05/geneva-motor-show-german-ceos-are-worried-about-us-tariffs-on-european-car-imports.html.
[28] Associated Press, US, EU Agree to Resolve US Tariffs on Steel, Aluminum Imports, ABC (July 25, 2018), https://abc7.com/politics/us-eu-agree-to-resolve-us-tariffs-on-steel-aluminum-imports/3823396/.
[29] Kenneth Rapoza, Dear China, Get Ready for 25% Tariffs, Forbes (Feb. 17, 2019), https://www.forbes.com/sites/kenrapoza/2019/02/17/dear-china-get-ready-for-25-tariffs/#26a235e65935.
[30] Stephanie Dhue, Steel and Aluminum Tariffs Remain A Headache Despite Trump’s Trade Deal with Mexico and Canada, CNBC (Nov. 30, 2018), https://www.cnbc.com/2018/11/30/steel-aluminum-tariffs-remain-even-after-trump-signs-new-nafta-deal.html.
[31] International Trade Administration, U.S. Dep’t Of Commerce, Current Foreign Retaliatory Actions (Mar. 4, 2019), https://www.trade.gov/mas/ian/tradedisputes-enforcement/retaliations/tg_ian_002094.asp.
[32] Jeff Daniels, Farmer Sentiment Takes Hit Amid Growing Worries over Trade War, CNBC (Mar. 5, 2019), https://www.cnbc.com/2019/03/05/farmer-sentiment-takes-hit-amid-worries-over-trade-war-says-survey.html.
[33] Kellie Ell, Tariffs ‘Absolutely Will’ Bring Back Jobs to America: Steel CEO, CNBC (Mar. 5, 2018), https://www.cnbc.com/2018/03/05/tariffs-absolutely-will-bring-back-jobs-to-america-steel-ceo.html.
[34] Amy Held, India Becomes Trump’s Latest Trade Target, NPR (Mar. 5, 2019), https://www.npr.org/2019/03/05/700345593/india-becomes-trumps-latest-trade-target.
[35] Michael Martina, Easier for China To Face Tariffs Than Bend to U.S. Pressure, Reuters (Mar. 4, 2019), https://www.reuters.com/article/us-usa-trade-china-analysis/easier-for-china-to-face-tariffs-than-bend-to-us-pressure-idUSKCN1QL15G.
[36] Jeff Spross, Why Aren’t Trump’s Tariffs Closing the Trade Deficit?, The Week (Dec. 10, 2018), https://theweek.com/articles/811385/why-arent-trumps-tariffs-closing-trade-deficit.
[37] International Trade Administration, U.S. Dep’t Of Commerce, Current Foreign Retaliatory Actions (Mar. 4, 2019), https://www.trade.gov/mas/ian/tradedisputes-enforcement/retaliations/tg_ian_002094.asp.
[38] Patrick Watson, Opinion: Forget the Trade Truce: Trump’s Tariffs Are Killing U.S. Jobs, MarketWatch (Dec. 5, 2018), https://www.marketwatch.com/story/forget-the-trade-truce-trumps-tariffs-are-killing-us-jobs-2018-12-05.
[39] Noah Smith, Tariff Man’s Trade War Will Claim Innocent Victims, Bloomberg (Dec. 4, 2018), https://www.bloomberg.com/opinion/articles/2018-12-04/trump-s-embrace-of-tariffs-hurts-u-s-consumers-more-than-china.
[40] NATO is a military alliance established in 1949. See David G. Haglund, North Atlantic Treaty Organization, Encyclopedia Britannica, https://www.britannica.com/topic/North-Atlantic-Treaty-Organization (last visited Mar. 17, 2019).
[41] Peter Morici, Opinion: America May Have To Abandon Free Trade With China, MarketWatch (Oct. 28, 2018), https://www.marketwatch.com/story/america-may-have-to-abandon-free-trade-with-china-2018-10-22.
[42] Id.
[43] Sherisse Pham, How Much Has The US Lost From China’s IP Theft?, CNN (Mar. 23, 2018), https://money.cnn.com/2018/03/23/technology/china-us-trump-tariffs-ip-theft/index.html.
[44] Grant Clark, What Is Intellectual Property, And Does China Steal It?, Bloomberg (Dec. 4, 2018), https://www.bloomberg.com/news/articles/2018-12-05/what-s-intellectual-property-and-does-china-steal-it-quicktake.
[45] See Charlene Fu and Curtis Chin, China is Stealing American Intellectual Property. Trump’s Tariffs are a Chance to Stop It, N.Y. Times (Sept. 17, 2018), https://www.latimes.com/opinion/op-ed/la-oe-fu-chin-the-upside-of-trumps-china-trade-war-20180917-story.html.
[46] Alex Lockie, US Calls Huawei And CFO Meng Wanzhou National-Security Threats, Indicts Company And Exec On Fraud And IP Theft Charges, Business Insider (Jan. 28, 2019), https://www.businessinsider.com/huawei-cfo-meng-wanzhou-indicted-fraud-ip-theft-security-concerns-2019-1.
[47] Timeline: What’s Going on with Huawei?, BBC (Jan. 18, 2019), https://www.bbc.com/news/technology-46483337.
[48] Klint Finley, If Convicted Huawei Facts Bigger Problems Than Fines, Wired (Jan. 29, 2019), https://www.wired.com/story/if-convicted-huawei-faces-bigger-problems-than-fines/.
[49] Everett Rosenfeld, China Says US Indictment Against Huawei Is ‘Unfair’ And ‘Immoral’, CNBC (Jan. 28, 2019), https://www.cnbc.com/2019/01/29/china-responds-to-us-indictment-against-huawei.html.
[50] Id.
